RBI Proposes Unified Interest-Rate Framework for Loans: What Banks, NBFCs and Borrowers Need to Track

Current development

The Reserve Bank of India has released the draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 for public comments, proposing a harmonised framework for pricing both fixed-rate and floating-rate loans across a wide range of regulated lenders. The draft was issued on 12 August 2026, and comments may be submitted to RBI up to 11 September 2026.

The proposal is significant because it would move multiple categories of regulated entities towards a common principles-based framework for interest-rate determination. It covers commercial banks, Regional Rural Banks, Urban Co-operative Banks, Rural Co-operative Banks, All-India Financial Institutions and Non-Banking Financial Companies, including Housing Finance Companies, for their domestic operations.

What RBI is proposing

RBI says the existing framework is uneven. Detailed benchmark-based lending rules currently apply mainly to commercial banks, while other regulated entities are governed largely by conduct-related instructions. RBI has also noted divergent practices in certain aspects of MCLR computation and limited regulatory guidance for fixed-rate loans.

The draft therefore proposes a single framework built around a benchmark plus risk-based spread approach. Both fixed-rate and floating-rate loans would be priced with reference to an internal or external benchmark plus a spread. A regulated entity would not be permitted to price a loan below the applicable benchmark for that loan.

Board-approved pricing policy would become central

Each regulated entity would need a comprehensive policy on interest rates approved by its Board or an authorised Board committee. The policy would have to cover the methodology for determining interest rates, the internal benchmark, components of the spread, loan categories and delegation of loan-pricing powers. RBI's draft also requires this policy to be reviewed at least annually.

For finance, treasury, ALM, credit and compliance teams, this would make documentation and governance around loan pricing more important. Pricing practices that are today driven by product conventions or business discretion may need to be tied more explicitly to an approved benchmark-and-spread methodology.

Daily reducing balance and monthly rests

The draft states that interest on advances should generally be charged at monthly rests and computed on a daily reducing balance basis using the Actual/Actual day-count convention. Separate rules are proposed for agricultural advances, including annual rests for long-duration crop loans and repayment-linked treatment for short-duration crop loans.

RBI also proposes that regulated entities explicitly cap the annual percentage rate on microfinance loans and on small-value personal loans where the principal does not exceed ₹50,000, while ensuring that the rate is not usurious. For short-term agricultural loans and advances to small and marginal farmers, total interest and other charges would not be allowed to exceed the principal amount.

Fixed-rate loans get a clearer regulatory structure

One of the most notable changes is the proposed framework for fixed-rate loans. The draft requires fixed-rate loans to be priced with reference to an internal or external benchmark plus a risk-based spread. This is a material shift because RBI's own consultation note says existing instructions contain very limited regulatory guidance on fixed-rate loans.

If the proposal is finalised broadly in its present form, lenders will need to ensure that fixed-rate product pricing can be traced to a documented benchmark and spread methodology rather than being treated as a stand-alone commercial quote.

Floating-rate reset rules become more prescriptive

For floating-rate loans, the loan agreement would need to specify the benchmark, reset periodicity and reset date. The proposed maximum reset periodicity is three months, and once the periodicity is fixed for a loan it would remain unchanged for the tenor of that loan.

The three-month cap would not be mandatory for Rural Co-operative Banks with total deposits up to ₹1,000 crore, Base Layer NBFCs, and Tier 1 and Tier 2 Urban Co-operative Banks. Agricultural loans would follow crop-linked reset rules, subject to a maximum reset period of 12 months.

MCLR methodology would be standardised for specified lenders

The draft proposes that the internal benchmark for commercial banks, RRBs, Tier 3 and Tier 4 UCBs, and Rural Co-operative Banks with total deposits above ₹1,000 crore be based on the marginal cost of funds and expressed as MCLR.

Marginal cost of funds would be calculated using a moving average of the marginal costs of domestic deposits and borrowings over the trailing three months. The underlying data would need to be system-generated and independently verifiable. The relevant internal benchmark would have to be published on the first calendar day of every month.

For accountants, internal auditors and finance-control teams in lending institutions, this could create additional requirements around data lineage, system controls, independent verification and governance over the components used in the benchmark calculation.

External benchmark linkage for personal and MSME loans

Under the draft, all floating-rate personal loans and floating-rate loans to MSMEs by commercial banks would have to be linked to an external benchmark. Other categories of regulated entities, including NBFCs and co-operative banks, would have discretion over whether to offer external-benchmark-linked floating loans.

Permitted external benchmarks include RBI's policy repo rate, Government of India Treasury Bill yields, the Secured Overnight Rupee Rate and other benchmarks published by Financial Benchmarks India Private Limited.

Spread revisions would face a three-year restriction

The draft separates the spread into credit risk premium and other components such as operating cost, term premium and business-strategy premium. The credit risk premium may be revised when the borrower's credit profile changes, subject to a comprehensive credit-risk review.

For floating-rate loans, components of the spread other than credit risk premium generally could not be revised before three years. A lender could reduce those components earlier for customer retention on justifiable and non-discriminatory grounds. The three-year restriction would not be mandatory for smaller RCBs, Base Layer NBFCs, and Tier 1 and Tier 2 UCBs covered by the draft carve-out.

This is particularly relevant for product-pricing and profitability teams because it could constrain the frequency with which non-credit-risk elements of loan spreads are re-priced after origination.

Existing benchmark-linked loans would need migration

The draft proposes that existing loans and advances linked to any internal or external benchmark be migrated to the new framework by 1 April 2029 through a one-time mapping exercise. The borrower's consent would be required, the revised rate could not place the borrower in a worse position than immediately before transition, and no migration charge could be levied.

The draft also addresses acquisitions, mergers and amalgamations. Where loans move to another regulated entity, the transferee would need to perform a one-time mapping under its own interest-rate policy without increasing the borrower's rate merely because of the transaction.

What finance and compliance teams should do now

- Do not treat the draft as final law. It is a consultation document and may change after feedback.

- Map current pricing policies. Banks, NBFCs, co-operative banks and AIFIs should compare existing fixed- and floating-rate pricing practices with the proposed benchmark-plus-spread framework.

- Review systems capability. Larger institutions may need to assess whether current systems can support three-month reset controls, daily reducing-balance calculations and independently verifiable marginal-cost data.

- Assess product documentation. Loan agreements and pricing disclosures may need changes if the final rules retain the proposed benchmark, reset and spread requirements.

- Identify transition exposure. Institutions should estimate the volume of existing benchmark-linked loans that could require migration by 1 April 2029.

- Consider submitting feedback. Stakeholders have until 11 September 2026 to comment through RBI's Connect 2 Regulate facility or the prescribed email route.

Proposed effective date

The draft states that the Directions would come into effect from 1 April 2027. RBI has clarified, however, that this is presently a consultation draft. After examining feedback, the central bank intends to issue final Directions separately for each category of regulated entity.

That distinction matters: lenders should begin impact assessment and system planning, but should not present the draft provisions to borrowers or internal stakeholders as binding requirements until RBI issues the final category-specific Directions.

Key takeaway

RBI's 12 August 2026 draft proposes a major redesign of India's loan-pricing framework by bringing fixed and floating loans across banks, NBFCs, co-operative banks, RRBs and AIFIs under a harmonised benchmark-and-spread structure. The most practical issues for finance and compliance teams are the proposed three-month floating-rate reset cap, standardised MCLR methodology for specified lenders, restrictions on revising non-credit-risk spread components, and the transition of existing benchmark-linked loans by 1 April 2029. The proposal is not yet in force, and comments are open until 11 September 2026.