The draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 will cover commercial banks, regional rural banks, co-operative banks, all-India financial institutions and non-banking financial companies (NBFCs), including housing finance companies.
The proposed directions are scheduled to come into effect from April 1, 2027.
Here are the key proposals borrowers should know.
Floating loan rates to follow a clearer reset framework
Under the proposed framework, lenders will have to price fixed- and floating-rate loans using an internal or external benchmark plus a risk-based spread. The benchmark, reset frequency and reset date must be specified in the loan agreement.
For floating-rate loans, the benchmark reset period cannot exceed three months. However, this requirement will not be mandatory for certain smaller regulated entities, including NBFCs in the Base Layer.
Bikash Kumar Mishra, Chief Financial Officer, Easy Home Finance, said the proposed framework could make floating-rate borrowing more predictable.
“Linking every floating rate to a clear benchmark with a maximum three month reset cycle brings overdue predictability for borrowers who have seen uneven transmission in the past,” Mishra said.
For borrowers, this does not mean EMIs will remain unchanged. A floating-rate loan can still become more expensive when the underlying benchmark rises. The proposed rules instead seek to make the benchmark and reset mechanism clearer.
Lenders face limits on changing loan spreads
The RBI has proposed restrictions on how lenders can revise the spread charged over the benchmark.
The spread can include the credit risk premium, operating costs, term premium and business strategy considerations. The credit risk premium can be revised when the borrower’s credit profile changes, subject to a review.
However, other components of the spread cannot be revised for three years on floating-rate loans. The three-year period will be counted from the first disbursement or the last spread revision, whichever is later.
Mishra said the proposed three-year stability in most spread components could make changes in EMIs easier for borrowers to track.
“The proposed three year stability on loan spreads is a key shift,” he said. “Freezing most spread components for three years after disbursement or revision should reduce that uncertainty and make EMI movements easier to understand.”
Siddharth Manchanda, Partner, JSA Advocates and Solicitors, also identified the spread provision as one of the more consequential parts of the draft. He said non-credit-risk components of the spread would not be allowed to increase during the three-year period, while reductions would have to be made on a non-discriminatory basis.
₹50,000 loans could get an all-inclusive APR ceiling
The proposed framework also has a specific provision for small-ticket borrowing.
The RBI wants lenders to put an explicit ceiling on the annual percentage rate (APR) for microfinance loans and small-value loans. The APR will include the interest rate as well as all other charges and fees. A small-value loan is defined as a personal loan of up to ₹50,000.
This could make the total cost of borrowing easier to compare, particularly where fees and other charges form a significant part of the cost.
Manchanda said that in small-ticket lending, the headline interest rate does not always capture the full cost for the borrower.
“In that segment the headline rate was never the real story; the fee stack was. Forcing everything into one number is the change that will actually be felt,” he said.
Interest calculation to be standardised
The RBI has also proposed a common method for calculating interest.
For most loans, interest will be charged at monthly rests and calculated on a daily reducing balance using the actual/actual day-count convention. Agricultural advances will have specified exceptions.
The move would standardise the way interest is calculated across regulated lenders.
Existing loans to move to the new framework by 2029
The proposed changes will also eventually affect existing benchmark-linked loans.
The RBI has proposed that all existing loans linked to an internal or external benchmark be migrated to the new framework by April 1, 2029, through a one-time mapping exercise. The borrower’s consent will be required for the transition.
The revised interest rate cannot be higher than the rate applicable immediately before migration, and lenders cannot charge a fee for the transition.
Mishra said the two-year window between the proposed implementation date for new loans and the migration deadline for existing loans gives lenders time to update their systems and communication processes.
“The timelines are also significant. New rules are proposed to apply to fresh loans from 1 April 2027, while all existing floating rate loans are expected to migrate to the new framework by 1 April 2029,” he said.
NBFC loans will not automatically become repo-linked
The draft does not require all lenders to use an external benchmark.
Commercial banks will have to link floating-rate personal loans and floating-rate MSME loans to an external benchmark. For NBFCs, regional rural banks, co-operative banks and all-India financial institutions, external benchmark linkage will remain optional.
Therefore, borrowers taking a floating-rate loan from an NBFC should not assume that the loan will automatically be linked to the RBI repo rate.
The draft is not final yet. The proposed directions are scheduled to take effect from April 1, 2027, subject to the RBI finalising the framework.
