RBI unveils harmonised draft Directions on interest rates on loans for all lenders
The RBI on Wednesday released draft Directions on “Interest Rates on Loans and Advances”, prescribing a principles-based framework for determination of interest rates on both fixed rate and floating rate loans, commensurate with the nature, complexity, and scale of the operations of the lenders
The Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 – Draft, which proposed to be made effective from April 01, 2027, requires lenders to have a comprehensive policy on interest rates on loans and advances, approved by the Board of Directors or a committee of the Board to which such powers have been delegated by the Board.
“This policy has lay down various aspects related to pricing of loans, including microfinance loans. Such aspects will include the 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. The policy shall be reviewed at least annually,” according to the draft Directions.
The proposed directions will apply to all major domestic lenders (regulated entities/REs), including commercial banks, regional rural banks, urban co-operative banks (UCBs), rural co-operative banks (RCBs), all-India financial institutions and non-banking financial companies, including housing finance companies.
All existing loans and advances linked to any internal or external benchmark shall be migrated to the interest rate framework prescribed in these Directions by April 1, 2029, through a one time mapping exercise.
“Such mapping shall be carried out with the consent of the borrower without putting the borrower in a disadvantageous position in terms of interest rate applicable to the borrower.
“The RE shall ensure that, upon such transition, the revised interest rate does not exceed the interest rate applicable to the borrower immediately before such transition. Further, the RE shall not levy any charges for such migration,” according to the Directions.
The RBI noted that at present, regulatory framework on interest rate on advances are applicable for commercial banks, covering instructions on internal and external benchmark-based lending frameworks for floating rate loans and determination of spreads over such benchmarks.
Regulatory instructions
Further, regulatory instructions on interest rates on loans and advances extended by other REs are largely with regard to conduct related aspects. Moreover, with respect to commercial banks, divergent practices have been observed in certain aspects, including determination of marginal cost of funds based lending rate (MCLR) (internal benchmark) and its components.
In addition, the extant guidelines contain very limited regulatory instructions regarding fixed rate loans. So, there is a need for harmonised Directions for all REs.
Under the proposed directions, while a lender may offer loans and advances at fixed or floating interest rates, interest can be charged on advances at monthly rests. However, in the case of agricultural advances and advances to farmers, interest shall be charged at longer rests.
“Interest shall be computed on daily reducing balance basis. A Regulated Entity (RE/lender) 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 (principal amount does not exceed ₹50,000)while ensuring that these are not usurious,” the RBI said.
A lender can determine the interest rate on a fixed/ floating rate loan with reference to its internal benchmark or an external benchmark, plus a risk-based spread. The lender cannot price a loan below the applicable benchmark for that loan.
Applicable benchmark
RBI said a commercial bank, RRB, UCB in Tier 3 & 4, or RCB having total deposits of more than ₹1000 crore shall publish the internal benchmark on the first calendar day of each month, which shall be the applicable benchmark for all loans and advances which are linked to this benchmark and sanctioned during that month.
Lenders have to determine the spread (the mark up added to the benchmark rate to account for costs and risk-premiums associated with a loan or advance) and its components — Credit Risk Premium (CRP), Operating Cost, Term Premium and Business strategy premium, in accordance with its policy.
The policy shall lay down the methodology for determining the quantum of each component of the spread and the range of spread for different loan categories. The spread shall comprise of credit risk premium and one or more other components.
The central bank invited comments/feedback on the draft Directions from the regulated entities and other stakeholders/members of public on or before September 11, 2026.
Published on August 12, 2026