The Reserve Bank of India has proposed to make external benchmark-linked interest rates optional for non-banking finance companies, marking a significant shift towards flexible loan-pricing standards aimed at improving monetary transmission and consumer protection.
The Reserve Bank of India has moved to widen and standardise its loan-pricing rules, proposing that non-banking finance companies should not be forced to link every floating-rate loan to an external benchmark. Under draft norms released this week, the central bank would keep that requirement mandatory for commercial banks on floating-rate retail and MSME loans, while making it optional for NBFCs, all-India financial institutions, regional rural banks and cooperative banks.
The draft marks the latest stage in a shift that began in 2019, when the RBI pushed banks on to an external benchmark system for new floating-rate personal, retail and MSME loans to improve the speed at which policy rate changes reach borrowers. Since then, the central bank has been trying to extend clearer, more consistent pricing rules beyond banks, after noting that other regulated lenders, including NBFCs and housing finance firms, still operated under less uniform frameworks.
In the new proposal, lenders would price both fixed and floating loans against either an internal or external benchmark, plus a risk-based spread. The RBI said the structure is meant to improve monetary policy transmission, align credit pricing more closely with risk and reduce arbitrary treatment of borrowers. It also said the new directions would replace the existing patchwork of rules across lender categories.
The draft goes further on consumer protection, saying loans of up to ₹50,000 should not carry usurious rates and that lenders must set an annual percentage rate cap for microfinance and small-value loans. For short-term farm loans to small and marginal farmers, the total of interest, fees and other charges could not exceed the principal. The RBI also said floating-rate agreements would need to spell out the benchmark, reset date and reset frequency, generally at intervals of no more than three months, although that rule would not apply to the smallest NBFCs and some smaller cooperative banks.
Under the transition plan, all loans would be moved on to the new framework by April 1, 2029 through a one-time mapping exercise requiring borrower consent. The RBI said the switch could not leave customers paying more than they were paying immediately before migration and that lenders would not be allowed to levy migration charges. It also said that if a benchmark disappears during a loan’s life, lenders would have to replace it without putting borrowers at a disadvantage.
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