RBI proposes guidelines for floating-rate loans: How they affect you?
What's the story
The Reserve Bank of India (RBI) has proposed a new set of guidelines to protect borrowers with floating-rate loans from changes in interest rate benchmarks. The draft, titled "Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026," aims to create a uniform framework for banks and other regulated entities to determine loan interest rates, benchmarks, and spreads. If finalized, these directions would come into effect on April 1, 2027.
Framework
Transitioning existing loans to new system
The proposed framework mandates a one-time mapping exercise to transition existing loans linked to internal or external benchmarks into the new system by April 1, 2029.
This process would require borrower consent and ensure that the revised interest rate isn't higher than what was applicable before the transition.
Notably, lenders wouldn't be allowed to charge any fee for this migration process under these guidelines.
Loan impact
Clear specification of benchmarks in loan agreements
The benchmark plays a key role in determining the interest rate for floating-rate loans, which is usually calculated as the benchmark plus a spread.
Any change in this benchmark could directly impact the effective interest rate, EMI, or loan repayment duration.
The RBI's proposed framework mandates clear specification of the benchmark, reset frequency, and date in loan agreements to mitigate such impacts.
Spread alterations
Changes to spreads and operating costs
The proposed framework also imposes restrictions on how lenders can change the spread over the benchmark.
The credit-risk premium can only be revised when there's a change in the borrower's credit profile and after a thorough assessment of their credit risk.
Other elements of the spread like operating costs, term premium, and business strategy premium generally can't be changed before three years for a floating-rate loan.
Discontinuation solutions
What if the benchmark is discontinued?
The draft guidelines also tackle scenarios where the benchmark linked to a floating-rate loan is discontinued.
In such cases, lenders would have to replace the benchmark without putting the borrower at a disadvantage.
The loan agreement could also mention a fallback benchmark that would come into effect if the original one becomes unavailable.
This ensures that changes don't automatically lead to higher borrowing costs for customers.
New guidelines
Pricing transparency
The proposed framework also aims to make pricing of new floating-rate loans more transparent.
All floating-rate personal loans and MSME loans offered by commercial banks would have to be linked to an external benchmark.
Other regulated entities such as NBFCs, regional rural banks, and cooperative banks would have the option of offering external benchmark-linked floating-rate loans.