The draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026, issued for public consultation, follows the central bank’s August 5 announcement that it would rationalise the regulatory framework for loan interest rates.
The central bank, led by Governor Sanjay Malhotra said that the new framework aims to standardise rules for different entities with the intention to increase transparency and ensure uniformity. The new interest norms are unlikely to impact loan equated monthly instalments (EMIs) or bring non banking finance companies (NBFCs) into the external benchmark linked lending regime (EBLR) on par with banks, the RBI said.
Also read: RBI proposes new rules to standardise how lenders set interest rates
The proposed directions will apply to commercial banks, regional rural banks, urban and rural cooperative banks, all-India financial institutions and non-banking financial companies, including housing finance companies. They are proposed to take effect from April 1, 2027.The RBI said the framework aims to harmonise rules across regulated entities while maintaining proportionality, address operational issues in the existing marginal cost of funds-based lending rate (MCLR) and external benchmark-linked lending rate frameworks, and standardise divergent practices around interest charging.
Under the proposed framework, lenders can offer loans at either fixed or floating rates. For both categories, the interest rate would have to be linked to an internal or external benchmark, along with a risk-based spread. A lender would not be allowed to price a loan below the applicable benchmark.
The latest measures seek to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection. On August 5, Deputy governor Shirish Chandra Murmu said that the emphasis is on transparency and conduct related measures in the new framework.
For floating-rate loans, the benchmark, reset frequency and reset date would have to be clearly specified in the loan agreement. The benchmark would have to be reset at a frequency chosen by the lender, but not more than once every three months. Once fixed for a loan, the reset frequency would remain unchanged through the loan’s tenor, subject to specified exemptions for smaller cooperative banks, certain NBFCs and some urban cooperative banks.
For agricultural loans, the reset period would be linked to the crop season, but could not exceed 12 months.
“The interest rate rules is to standardize different rules for different regulated entities. This will improve transparency because people will know what are interest rates and how they are set. So this is more of a rationalization move which will improve consumer protection,” governor Malhotra said in a post policy press conference.
Changes to MCLR framework
The draft proposes that commercial banks, RRBs, Tier 3 and Tier 4 urban cooperative banks, and rural cooperative banks with deposits above Rs 1,000 crore would continue to use an internal benchmark based on the marginal cost of funds, with the lending rate referenced to it being the MCLR.
However, the RBI has proposed a specific methodology for calculating the marginal cost of funds. It would be calculated as a moving average of the marginal costs of domestic deposits and borrowings over the trailing three-month period.
The marginal cost for a month would be based on the annualised weighted average interest cost of fresh deposits and fresh borrowings. The calculation would also have to be system-generated and independently verifiable.
Eligible lenders would have to publish their internal benchmark on the first calendar day of every month, which would then apply to loans linked to that benchmark and sanctioned during that month.
External benchmark mandatory for some loans
The RBI has proposed retaining external benchmark linkage for all floating-rate personal loans and floating-rate loans to MSMEs extended by commercial banks.
The draft says commercial banks may also offer external benchmark-linked loans to other borrower categories at their discretion.
For RRBs, cooperative banks, NBFCs and all-India financial institutions, linking floating-rate loans to an external benchmark would not be mandatory. These entities could choose to offer such loans to any category of borrowers.
Interest to be charged at monthly rests
The RBI policy draft also proposes that interest on advances should generally be charged at monthly rests.
For agricultural advances, interest on long-duration crops would be charged at annual rests, while interest on short-duration crops would be based on repayment due dates, taking the crop season into account.
Interest on agricultural advances would be compounded only after the repayment becomes overdue.
The RBI said the draft directions are being issued for public consultation and that, after examining the feedback, final directions will be issued separately for each category of regulated entity.
Banks, financial institutions, other regulated entities, stakeholders and members of the public can submit comments on the draft by September 11, 2026.