The Reserve Bank of India has outlined plans for a comprehensive overhaul of how lenders determine and reset interest rates, aiming for greater consistency and transparency across banks and financial institutions.
The Reserve Bank of India has proposed a sweeping overhaul of how lenders price and reset interest rates, a move that would bring more standardisation to loans issued by banks, non-banking financial companies and other regulated entities. According to the proposal, floating-rate personal and MSME loans from commercial banks would be tied to external benchmarks, while the frequency of benchmark resets would be limited to once every three months, subject to specific exemptions.
The draft framework would also reshape the marginal cost of funds-based lending rate, or MCLR, by requiring it to reflect a three-month moving average of the marginal cost of fresh deposits and borrowings. The central bank has further proposed that the credit risk premium can be changed only if a borrower’s credit profile changes, and that other parts of the spread on floating-rate loans should not be revised for at least three years.
Existing loans would not be forced into the new system immediately. Instead, they would migrate to the revised framework by April 1, 2029, only with borrower consent and without any increase in interest rates. The RBI also wants interest to be calculated on a daily reducing balance basis using the Actual/Actual day count convention, a method that could make pricing rules more uniform across lenders.
The proposal comes amid a broader regulatory push by the RBI to tighten oversight and improve transparency in financial products. In recent months, the central bank has expanded its Prompt Corrective Action framework to government-owned NBFCs, introduced rules on penal charges rather than penal interest and pressed banks and NBFCs to improve monetary policy transmission through lending and deposit-rate changes. The latest draft, if finalised, would extend the new interest-rate architecture to commercial banks, regional rural banks, co-operative banks, all-India financial institutions and NBFCs.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
