The Reserve Bank of India (RBI) has introduced a new draft framework for loan pricing, aimed at making interest rates, the reset process and spreads more transparent. These proposed rules will apply to floating rate loans, changes in spreads and also to existing loans.
This draft proposes making benchmark reset mandatory within three months for floating rate loans, limiting the components of the spread, and imposing an all-inclusive APR ceiling on small loans up to Rs 50,000.
Let us understand this new loan pricing framework of RBI in detail and find out whether it can prove to be a big change for the common borrower.
What’s Happening?
RBI has issued the draft of ‘Interest Rates on Loans and Advances Directions 2026’, which will apply to commercial banks, NBFCs, housing finance companies, regional rural banks and co-operative banks. RBI says that this framework is focused on ending ‘divergent practices’ among lenders and introducing a ‘broad, principles-based framework’ for both fixed and floating rate loans.
The most important proposal is related to the reset of floating rate loans. According to the draft, floating rate loans will be linked to an internal or external benchmark, and the benchmark reset period cannot exceed three months for most regulated entities. Once the reset frequency is chosen, it cannot be changed during the tenure of the loan, and the benchmark, reset periodicity and reset date will be clearly written in the loan agreement.
Impact on Benchmark Reset and Spread
The three-month reset rule will be beneficial for the borrower during rate cuts. Currently, many loans are reset only once a year, due to which the benefit of RBI’s rate cut is received late. In the new framework, floating rate loans will not have to wait more than three months. However, when rates rise, its impact will also fall on the borrower within three months.
RBI has also proposed to keep the benchmark and spread separate. The credit risk premium can be changed only when the borrower’s credit profile changes, while other spread components cannot be changed for three years. This will make it difficult for lenders to increase the spread without reason.
RBI’s New Restrictions on Spread
RBI has proposed to separate the benchmark and the spread. The spread can include credit risk premium, operating cost, term premium and business strategy premium. The biggest point is that the credit risk premium can be changed only when the borrower’s credit profile changes, and the remaining spread components cannot be changed for three years.
This means that if there is no change in the borrower’s profile, the lender cannot arbitrarily increase the spread. However, if the credit profile deteriorates, the risk premium can increase. According to CNBC TV18, Manish Mishra, CEO of GenZCFO, says that the borrower should understand the difference between the benchmark and the spread; if the credit score improves, the lender cannot be forced to reduce the rate on its own, but this can certainly become a basis for negotiation.
New Rules on Personal and MSME Loans
For commercial banks, it will be mandatory to link floating rate personal and MSME loans to an external benchmark. This will help borrowers easily understand and track the impact of rate changes. However, for NBFCs, RRBs and co-operative banks, this will remain optional for now.
In addition, there is a proposal for an APR ceiling on personal and microfinance loans up to Rs 50,000. This will include interest along with all fees and charges, so that the actual cost of small loans will be clearly visible to the borrower in a single number.
What will Change For Those with Existing Loans?
For borrowers with existing loans, RBI has given a transition window. All existing benchmark-linked loans will have to be migrated to the new framework by 1 April 2029, and this will be with the borrower’s consent. The most important point is that the new rate cannot be higher than the rate before migration, and no charge can be levied for migration. If the loan is transferred from one lender to another but the responsible lender does not change, the old rate terms will continue.
For investors and borrowers, this framework can be beneficial in the long term. The three-month reset of floating rate loans and the freeze on spread components for three years makes EMI calculation more predictable. According to CNBC TV18, Bikash Kumar Mishra, CFO of Easy Home Finance, says that the three-year stability on spreads will make it easier to understand the fluctuations in interest rates, though borrowers should not assume that their EMI will always remain stable. When the benchmark rises, floating rate loans can become costlier, but now its mechanism will be clearly visible.
What’s Next?
This draft of RBI is not yet final, and changes may be made in the rules after the consultation process. According to the timeline given in the draft, the rules will apply to new loans from 1 April 2027, while existing loans will have to be migrated to the new framework by 1 April 2029. This two-year gap gives lenders time to update their systems and communication processes.
The biggest impact of this framework will be on transparency in lending practices, not directly on a reduction in interest rates. The benefit of changes in the repo rate will now reach borrowers faster, and there will also be a check on increases in spreads by lenders. However, borrowers are advised that at the time of migration, along with the headline interest rate, they should also compare the new EMI and tenure, because the real benefit will be visible in the total cost.
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