RBI issues draft rules on harmonised interest rates for all loans

RBI published draft rules for harmonised interest rates for all regulated entities. The goal is to ensure effective monetary policy transmission and fair treatment of borrowers for both fixed and floating rate loans, effective April 1, 2027.

RBI Drafts New Rules for Loan Interest Rates

RBI issued draft rules on harmonised interest rate directions for all regulated entities to ensure effective monetary policy transmission, appropriate pricing of credit risk, and fair treatment of borrowers.

The central bank published the draft guidelines on Wednesday, titled "Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026," following its developmental and regulatory policies statement on August 5, 2026. The proposed directions aim to create a principles-based framework for interest rates on both fixed and floating rate loans.

Key Proposals in the Draft Framework

Under the draft framework, effective April 1, 2027, all floating-rate loans will reset within a maximum period of three months. Marginal Cost of Funds Based Lending Rate (MCLR) calculations will use a three-month moving average of the weighted cost of fresh deposits and fresh borrowings.

Expanding Regulatory Oversight

"At present, regulatory framework on interest rate on advances are applicable for Commercial Banks (including Small Finance Banks and Local Area Banks), covering, inter alia, instructions on internal and external benchmark-based lending frameworks for floating rate loans and determination of spreads over such benchmarks," the RBI noted.

"Regulatory instructions on interest rates on loans and advances extended by other REs (i.e., Non-Banking Financial Companies, All India Financial Institutions, Regional Rural Banks, Urban Cooperative Banks, and Rural Cooperative Banks) are largely with regard to conduct related aspects," the draft document added.

The central bank observed divergent practices among commercial banks in determining internal benchmarks like MCLR and noted limited instructions for fixed-rate loans.

Regulations on Spreads and Risk Premiums

Non-credit risk spread components on floating-rate loans cannot undergo revision for three years, while the Credit Risk Premium can change only when the borrower's credit profile changes.

Transition and Consultation

Existing floating-rate loans must migrate to the revised structure by April 1, 2029, with borrower consent and without additional fees or rate increases.

Stakeholders and public members can submit comments and feedback on the draft directions through the 'Connect 2 Regulate' portal on the RBI website or via email by September 11, 2026. Final directions will be issued separately for each regulated entity category after examining the feedback. (ANI)

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