The Reserve Bank of India’s proposed draft lending regulations aim to speed up the pass-through of interest rate changes across financial institutions, though concerns remain over reduced pricing flexibility for non-banking finance companies and mortgage lenders.
The Reserve Bank of India’s draft lending rules could speed up loan-rate pass-through across parts of the financial system, but analysts said the biggest immediate effect may be on pricing flexibility rather than headline earnings. According to Business Standard, 360 ONE Capital described the proposal as mildly negative for middle- and upper-layer non-banking finance companies and housing finance companies, though it said the damage would be softened by allowing those lenders to keep using internal benchmarks.
The draft, published on Wednesday for public consultation, would require floating-rate benchmarks to be reset at least every 3 months, while the non-credit-risk portion of the spread could not be changed for 3 years. Any adjustment to the credit-risk premium would depend on a fresh review of the borrower’s profile. 360 ONE Capital said the retention of internal benchmark flexibility “significantly mitigates the impact” and added that it did not expect a material financial hit to the companies it covers. Base-layer NBFCs would be exempt from the 3-month reset and 3-year spread restrictions.
Motilal Oswal said the proposed framework would improve transparency and accelerate transmission, with floating-rate loans reset within 3 months and the marginal cost of funds-based lending rate, or MCLR, calculated using a 3-month moving average of the weighted cost of fresh borrowings and deposits. The brokerage said banks could be the first to benefit if interest rates rise over the next 6 to 12 months, although public-sector banks might face some near-term pressure because they have already benefited from delayed MCLR repricing. It added that the gap in net interest margin performance between private and public-sector banks should narrow over time.
Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, said the broad intent of the rules was to speed up transmission by shortening reset periods and standardising loan-pricing mechanics. He pointed to the absence of a forced external benchmark for NBFCs as an important positive, saying there was no requirement for repo-rate-linked or external benchmark-based lending for those firms. At the same time, he said keeping spreads unchanged for 3 years would limit lenders’ room to manoeuvre. Ganapathy also said floating-rate MSME loans would have to be linked to an external benchmark such as the repo rate, while the proposed 3-month moving average for funding costs would help make rate transmission faster. That comes against a backdrop of uneven repo-rate pass-through to NBFCs: Financial Express reported that the Reserve Bank’s own study found a 1 percentage point move in the policy rate translated into only a 24 basis point change in NBFC borrowing costs over 3 quarters, underscoring how funding mix and market access still shape transmission.
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