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The Reserve Bank of India (RBI) has proposed a common framework for determining interest rates on loans and advances across banks and non-banking financial companies (NBFCs). The draft rules seek to bring greater consistency in the way fixed-rate and floating-rate loans are priced while allowing regulated entities to account for their operational scale, loan categories and borrower risk. The proposed directions would also require board-approved interest rate policies and annual reviews. For microfinance and small-value loans, lenders would have to set an explicit ceiling on the Annual Percentage Rate (APR), including interest and other charges.
The Reserve Bank of India (RBI) has issued draft directions proposing a harmonised framework for determining interest rates on loans and advances offered by banks and non-banking financial companies (NBFCs).
At present, the regulatory framework governing interest rates on advances is primarily applicable to commercial banks, while NBFCs are largely governed by requirements covering conduct and fair practices. The proposed framework is intended to bring the two sets of regulations closer and establish common principles for interest rate determination across regulated entities.
Under the proposed rules, all regulated entities will follow a broad, principles-based framework for pricing both fixed-rate and floating-rate loans. The framework would take into account the nature, complexity and scale of the operations of each regulated entity.
The proposed directions will be known as the Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026. If finalised, they are proposed to come into effect from April 1, 2027.
The move follows RBI Governor Sanjay Malhotra's announcement earlier this month that the central bank would work towards harmonising regulations governing interest rates across banks and NBFCs.
The RBI has invited comments from the public and stakeholders on the draft until September 11, 2026.
The proposed directions would apply only to the domestic operations of regulated entities. They would also require every regulated entity to have a board-approved policy covering interest rates on loans and advances. These policies would have to be reviewed at least once a year.
The policy would have to cover various aspects of loan pricing, including microfinance loans. Among other requirements, regulated entities would need to specify the methodology used to determine interest rates, the internal benchmark, the components of the spread, categories of loans and the delegation of authority for loan pricing.
For microfinance loans and small-value loans, regulated entities would be required to clearly prescribe a ceiling on the Annual Percentage Rate (APR). The APR would include the applicable interest rate as well as other charges and fees. The draft also states that such rates and charges should not be usurious.
The proposed framework sets out the broad approach for both fixed-rate and floating-rate lending. For fixed-rate loans, the interest rate would be linked to either an internal benchmark or an external benchmark, along with a risk-based spread.
The same broad approach has been proposed for floating-rate loans, with the interest rate determined using an internal or external benchmark and an additional risk-based spread based on the borrower's risk.
The RBI's existing regulatory framework already distinguishes between the approaches followed by banks and NBFCs. Its regulatory handbook notes that banks have specific requirements around benchmark-linked lending, including external benchmark-based pricing for certain retail and MSME loans, while NBFCs have historically operated under a board-approved interest rate model that considers factors such as the cost of funds, margin and risk premium.
The proposed directions would therefore create a more uniform structure while retaining scope for lenders to price loans based on their individual operating models and the risk associated with borrowers and loan categories.
Source PTI
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