The Reserve Bank of India aims to standardise and simplify loan rate setting across the financial sector, enhancing transparency and comparability for borrowers, amid recent reforms and efforts to broaden access to banking services.
The Reserve Bank of India has moved to tighten and simplify the way loan rates are set across the financial system, proposing a single, more uniform rulebook for banks, housing finance companies and non-banking financial companies. The central bank said the aim is to make pricing clearer for borrowers, improve consistency across lenders and ensure policy-rate changes are passed through more efficiently.
According to the RBI, the draft framework will be principle-based rather than tied to different rules for different types of regulated entities. It is also meant to iron out practical differences in the way lenders charge interest, including day-count conventions and the dates on which benchmark-linked rates are reset. Draft directions will be issued for public comment shortly, giving lenders and borrowers a chance to react before the final rules are locked in.
For borrowers, the significance is straightforward: the more standardised the pricing system, the easier it should be to compare loans and understand why one lender is cheaper than another. That matters in a market where the rules have already shifted several times over the past 15 years. The RBI moved from the benchmark prime lending rate to the base rate in 2010, then to the marginal cost of funds-based lending rate, or MCLR, in 2016, and later pushed new floating-rate retail and MSME loans on to external benchmarks in 2019 to improve transmission.
That history helps explain why the current review matters. SBI Economic Research has said about 67.6 per cent of bank loans are already under the external benchmark regime, suggesting that a large chunk of lending is now linked more directly to policy rates. By seeking to harmonise the rules across the broader regulated sector, the RBI is effectively trying to reduce gaps between bank loans and loans from other lenders that often compete for the same customers, from homebuyers to small businesses.
The governor, Sanjay Malhotra, also used Wednesday’s policy press conference to strike a cautious note on another sensitive issue: whether merchant discount rates, or MDR, should apply to some UPI transactions. He said it was too early to draw conclusions, but argued that public payment infrastructure has to be funded somehow, whether through taxes or a “user pays” model. At present, UPI transactions do not attract MDR, while debit and credit cards typically do.
Beyond loan pricing, the RBI is also widening access in parts of the banking system that have long served smaller savers and borrowers. It has decided to resume “on tap” licensing for urban co-operative banks, which could allow new entrants after a pause that began in 2004. The move may support financial inclusion, but analysts say it will only work well if governance, technology and oversight keep pace. The central bank is also updating its credit monitoring framework for rural co-operative banks, whose share of co-operative sector assets has risen in recent years, even as they continue to face concentration risks.
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