RBI Draft Interest Rate Directions 2026: Key FAQs for Banks, NBFCs and Financial Institutions

Introduction

Interest-rate regulation has traditionally been less about prescribing a single price of credit and more about prescribing the architecture within which that price is determined. The Reserve Bank of India’s Draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 takes that architecture several steps further.

Proposed to take effect from 1 April 2027, the Draft Directions seek to create a common interest-rate framework across commercial banks, RRBs, UCBs, RCBs, AIFIs and NBFCs, including HFCs. The central proposition is deceptively simple: the price of a loan should be traceable to a benchmark and a risk-based spread, rather than emerging from an opaque exercise of pricing discretion.

For financial institutions, however, this is not merely a pricing-policy exercise. It touches the economics of lending, margin management, credit-risk models, loan documentation, technology architecture, customer communication, governance and even M&A diligence.

The Draft Directions therefore represent a shift from “what rate may the lender charge?” to “how can the lender demonstrate why this rate was charged?”

Q1. What do the Draft Directions change about how banks and financial institutions can determine interest rates on loans?

The Draft Directions propose that both fixed-rate and floating-rate loans must be priced with reference to an internal or external benchmark plus a risk-based spread. A regulated entity cannot price a loan below the applicable benchmark. The spread may comprise a Credit Risk Premium (CRP), operating cost, term premium and business strategy premium. Business strategy premium may take into account considerations such as competition, liquidity and expected returns. The proposal therefore does not prescribe a uniform interest rate for borrowers. Instead, it seeks to ensure that differences in pricing can be traced to a documented pricing methodology. A lender may continue to differentiate between borrowers and products, but the basis for that differentiation will need to be capable of being explained, documented and supported by the lender’s policy.

Q2. Will every regulated entity need a Board-approved interest-rate policy?

Yes. Every regulated entity will be required to maintain a comprehensive policy on interest rates for loans and advances, approved by its Board of Directors or a committee of the Board to which such powers have been delegated. The policy must be reviewed at least annually. The policy is required to address the methodology for determining interest rates, the internal benchmark, components of the spread, loan categories and delegation of powers for loan pricing, including pricing of microfinance loans. This elevates loan pricing from being primarily a business or product-level function to a Board-governed framework.

Q3. What is changing for floating-rate loans, and how often can their benchmark be reset?

For floating-rate loans, the loan agreement must expressly specify the benchmark, reset periodicity and date of reset. The benchmark reset periodicity generally cannot exceed three months. Once selected for a loan, the periodicity must remain unchanged for the entire tenor, subject to specified exemptions. Agricultural loans receive separate treatment, with reset linked to the crop season but capped at 12 months. This places greater importance on precise loan documentation and system configuration.

Q4. What is the proposed MCLR and internal benchmark framework?

For commercial banks, RRBs, Tier 3 and Tier 4 UCBs, and RCBs with total deposits exceeding INR 1,000 crore, the internal benchmark must be based on marginal cost of funds, with the interest rate referencing that benchmark being MCLR. Marginal cost of funds is proposed to be a three-month moving average of the annualised weighted average cost of fresh domestic deposits and fresh borrowings. The calculation is expected to be system-generated and independently verifiable. The commercial significance is substantial: treasury management, loan pricing and net interest margin management become closely connected to the benchmark methodology.

Q5. Which loans will have to be linked to an external benchmark?

Commercial banks must link all floating-rate personal loans and floating-rate loans to MSMEs to an external benchmark. They may also, at their discretion, use external benchmarks for other borrower categories. RRBs, UCBs, RCBs, NBFCs and AIFIs are not subject to the same mandatory requirement and may choose whether to offer external-benchmark-linked floating-rate loans. For banks, this could increase sensitivity of loan yields to market benchmark movements and have implications for net interest margins and asset-liability management. NBFCs retain greater flexibility in benchmark selection.

Q6. Can a lender increase the Credit Risk Premium whenever it wants?

No. The CRP must be positive and may be revised only where the borrower’s credit profile undergoes a change, in accordance with the lender’s policy and loan agreement. A comprehensive credit-risk review must precede the revision. A lender therefore cannot increase CRP merely because the economics of an existing loan have become less attractive. The change must be connected to borrower credit risk and supported by the requisite review. Credit-risk methodology, monitoring triggers and documentation will consequently become important parts of the pricing architecture.

Q7. What is the three-year restriction on changes to the spread?

For floating-rate loans, spread components other than CRP generally cannot be revised before three years. The period runs from first disbursement or the last spread revision, whichever is later. A limited exception permits reductions for customer retention where justified, non-discriminatory and consistent with policy. Initial pricing therefore becomes materially more consequential. Underestimating operating costs, liquidity costs or expected returns may constrain later upward repricing.

Q8. How do the Draft Directions change interest computation and pricing for microfinance, small-value and agricultural loans?

Interest is generally to be charged at monthly rests and computed on a daily reducing balance basis using the Actual/Actual day-count convention. Agricultural advances have separate treatment. For short-term agricultural loans to small and marginal farmers, total interest and other charges or fees cannot exceed principal. For microfinance and small-value personal loans, REs must explicitly put a ceiling on APR inclusive of interest and other charges/fees, while ensuring pricing is not usurious. A small-value loan is a personal loan up to INR 50,000.

Q9. What happens to existing benchmark-linked loans, and what is the 2029 deadline?

Existing loans and advances linked to an internal or external benchmark must be migrated to the new framework by 1 April 2029 through a one-time mapping exercise. Migration requires borrower consent, cannot disadvantage the borrower, and the revised rate cannot exceed the immediately preceding applicable rate. No migration charge may be levied. For large lenders, this may involve multiple legacy benchmarks, spread structures and reset mechanisms, making migration a legal, operational and technology exercise rather than a simple rate-mapping exercise.

Q10. What should banks, NBFCs and other financial institutions do before the Draft Directions take effect?

REs should review their Board-approved interest-rate policies; map products across fixed/floating and internal/external benchmark categories; document spread methodologies; and review CRP triggers and governance. Loan agreements and sanction letters should be assessed for benchmark, reset and fallback provisions. Technology systems should be tested for daily reducing-balance computation, Actual/Actual day-count conventions, benchmark resets and spread calculations. Institutions should also identify legacy benchmark-linked loans requiring migration by 1 April 2029 and establish processes for borrower consent, mapping and auditability.

Disclaimer: This FAQ is based on the Draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 and the accompanying analysis provided for review. The Directions are in draft form and are proposed to come into effect from 1 April 2027. This FAQ is intended for general information only and does not constitute legal advice.

For further queries or details, you may contact:

Ms. Kritika Krishnamurthy

Founding Partner

AK & Partners

info@akandpartners.in