RBI proposes tighter loan pricing rules: External benchmark norms, APR caps and key changes explained for borrowers

The Reserve Bank of India (RBI) has proposed a harmonised framework for determining interest rates on loans, seeking to make lending practices more transparent and consistent across banks and other regulated lenders. The draft framework proposes board-approved pricing policies, benchmark-linked rates and safeguards against excessive pricing of small-value loans.

The proposals are part of the RBI’s broader effort to improve monetary policy transmission, ensure that credit is priced according to risk and provide borrowers with greater clarity on how their loan rates are determined. The draft rules are open for public comments until 11 September 2026 and are proposed to take effect from 1 April 2027.

Importantly, the proposal does not mean that all NBFCs will be forced to link floating-rate loans to an external benchmark. The mandatory external benchmark requirement would apply to commercial banks for floating-rate retail loans and loans to micro, small and medium enterprises (MSMEs), while NBFCs and several other regulated entities would have the discretion to adopt external benchmarks.

RBI proposes a common framework for loan pricing

Under the proposed framework, regulated entities will have to maintain a comprehensive, board-approved policy governing the pricing of loans and advances. The policy will specify how interest rates are determined, the applicable benchmarks, components of the spread, loan categories and the delegation of pricing powers.

The policy will also have to be reviewed at least once a year.

For both fixed- and floating-rate loans, the RBI has proposed a structure based on a benchmark plus a risk-based spread. Lenders would not be permitted to price loans below the applicable benchmark.

For floating-rate loans, the benchmark, reset frequency and reset date would have to be disclosed in the loan agreement. The benchmark would generally have to be reset at intervals of no more than three months. The framework also proposes that interest be calculated on a daily reducing balance using the actual/actual day-count convention.

The spread over the benchmark could include components such as a credit risk premium, operating costs, term premium and business strategy premium. The credit risk premium could be revised if the borrower’s credit profile changes following a comprehensive review. Other components of the spread generally could not be revised before three years, subject to specified exceptions.

For lenders with total deposits above ₹1,000 crore, the proposed internal benchmark would be based on the marginal cost of funds, calculated using a three-month moving average of the marginal cost of domestic deposits and borrowings. Such lenders would also have to publish the internal benchmark on the first calendar day of every month.

The RBI said it had observed divergent practices among banks in determining the marginal cost of funds-based lending rate (MCLR), prompting the move towards a more principles-based framework.

What the proposed rules mean for borrowers

For bank customers, one of the biggest changes could be greater transparency in floating-rate loans. The RBI proposes that all floating-rate personal or retail loans and floating-rate MSME loans offered by commercial banks should be linked to an external benchmark.

External benchmark-linked lending can improve the transmission of changes in the RBI’s policy rate to borrowers because the benchmark is outside the individual bank’s control. Existing loans will have to be migrated to the proposed framework through a one-time mapping exercise by 1 April 2029, according to the draft.

NBFCs, all-India financial institutions, regional rural banks and cooperative banks, however, would be allowed to decide whether to offer external benchmark-linked floating-rate loans. This means borrowers taking loans from NBFCs may not necessarily see the same benchmark-linking mechanism as bank customers.

The RBI has also proposed a specific safeguard for small-value and microfinance loans. Regulated entities would have to put an explicit ceiling on the annual percentage rate (APR), which includes interest and other charges and fees, and ensure that the rate is not usurious. An individual personal loan of up to ₹50,000 would qualify as a small-value loan under the proposal.

For short-term agricultural loans to small and marginal farmers, the total interest, charges and fees would not be allowed to exceed the principal amount.

The RBI has invited comments on the draft until 11 September 2026. The proposed directions would apply to banks, NBFCs, cooperative banks, housing finance companies and all-India financial institutions, subject to the specific provisions and exemptions applicable to each category.