The Reserve Bank of India has unveiled plans to introduce a stricter, more transparent framework for loan pricing, including caps on microfinance interest rates, aiming to improve policy transmission and protect borrowers.
The Reserve Bank of India has proposed a tighter and more uniform framework for loan pricing, a move that would force banks and other regulated lenders to spell out in detail how they set interest rates and spreads. According to Business Today, each lender would need a board-approved policy covering benchmark selection, pricing methodology, loan categories and the powers delegated to staff for deciding rates, with the document reviewed at least once a year.
The draft rules are meant to address what the central bank sees as uneven pricing practices, particularly in the way lenders calculate the marginal cost of funds-based lending rate, or MCLR, an internal benchmark used for some loans. For fixed-rate products, lenders would have to anchor pricing to either an internal or external benchmark and add a risk-based spread, while also avoiding loans priced below the relevant benchmark. Floating-rate loans would follow the same broad structure, with the RBI saying all floating-rate personal loans and MSME advances from banks should be tied to an external benchmark.
The proposal would also require existing benchmark-linked loans to shift to the new system by April 1, 2029. For commercial banks and other lenders with deposits above ₹1,000 crore, the internal benchmark would be based on a three-month moving average of the marginal cost of domestic deposits and borrowings, and lenders would have to publish that benchmark on the first day of each month. The RBI says the aim is to improve the transmission of policy-rate changes to borrowers and ensure credit is priced more closely to risk.
Separately, the central bank wants lenders to impose caps on the annual percentage rate charged on microfinance and other small-value loans, in an effort to curb excessive pricing. A personal loan of up to ₹50,000 would fall into that category under the draft. The framework, once finalised, would apply not only to banks but also to NBFCs, co-operative banks, mortgage lenders and all-India financial institutions. The RBI has invited comments by September 11, with the rules proposed to take effect from April 1 next year.
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