Synopsis

The Reserve Bank of India is harmonizing interest rate determination methods for regulated entities. New guidelines will define internal benchmarks and loan pricing components for banks. Floating rate loans will have benchmark resets not exceeding three months. Existing loans must migrate to the new framework by April 2029. These draft guidelines are open for public comment until September 11.

Mumbai: The Reserve Bank of India (RBI) has asked regulated entities (REs) to harmonize methodology for determining interest rates, including defining the internal benchmark, the components of the spread, the loan categories, and the delegation of powers for loan pricing in draft guidelines on interest rates released on Wednesday.

In a case of floating rate loans, the benchmark rate shall be reset on the first calendar day of the month in which the reset is due, RBI said. Res have been given the freedom to calculate their internal or external benchmark, plus a risk-based spread. However, the benchmark on a floating rate loan shall be reset shall not exceed three months, RBI said. For agricultural loans the periodicity of reset shall be linked to crop season but not more than 12 months.

“Interest shall be computed on daily reducing balance basis with actual day count followed for computation of interest. A RE shall explicitly put a ceiling on the annual percentage rate (APR) inclusive of interest rate and all other charges / fees on microfinance loans and small value loans while ensuring that these are not usurious,” RBI said. Small value loans means personal loans where the principal amount does not exceed Rs 50,000, RBI said.

The guidelines follow RBI’s announcement post its monetary policy review earlier this month. Public comments on the draft guidelines are being sought by September 11. The final guidelines shall come into effect from April 1, 2027.

The internal benchmark for a commercial bank, regional rural banks (RRBs), urban co-operative banks (UCBs) in Tier 3 & 4 towns shall be based on the marginal cost based lending rate (MCLR), calculated as a moving average of the marginal costs of domestic deposits and borrowings for the bank during the trailing 3-months period. These banks having total deposits of more than Rs 1000 crore shall publish the internal benchmark on the first calendar day of each month.

All floating rate personal loans and floating rate loans extended to MSMEs by commercial banks shall be linked to an external benchmark, RBI said.

REs shall determine the spread and its components in accordance with their policy which should lay down the methodology, component and range of spread for different loan categories. The spread shall comprise of credit risk premium (CRP) and one or more other components like operating cost, term premium and business strategy premium which includes considerations like competition, liquidity, expected returns, and other commercial considerations.

“The components of the spread may be positive or zero. However, the CRP shall be positive (i.e., it shall not be zero). CRP shall be revised only when the borrower’s credit profile undergoes a change, in accordance with its policy and terms of the loan agreement. It shall also be preceded by a comprehensive review of the borrower's credit risk profile in accordance with the RE's policy,” RBI said. Components of the spread other than the CRP shall not be revised before three years for a floating rate loan.

REs have been given the flexibility to reduce components of the spread for a loan category before the three year period, on justifiable grounds. The three year period shall be reckoned from the date of the first disbursement of the loan or the date of the last revision (increase or decrease) of the spread, whichever is later. These provisions are not mandatory for rural co-operative banks with total deposits up to Rs 1000 crore, NBFCs in the base layer, and urban co-operative banks in Tier 1 and Tier 2 towns.

All existing loans and advances linked to any internal or external benchmark shall be migrated to the new interest rate framework, by April 1, 2029, through a one time mapping exercise by taking the consent of the borrower while ensuring that the revised interest rate does not exceed the interest rate applicable to the borrower immediately before such transition without levying any charges, RBI said.

Loans covered by schemes, including refinance schemes, formulated by Government of India or a Government Undertaking wherein interest rates are required to be charged as per the schemes, loans sanctioned as part of a resolution plan, lending in term money market and advances to FCNR (B) depositors are exempt from these directions, RBI said.