The Reserve Bank of India has rolled out a sweeping draft framework that could put an end to a long-standing practice among lenders, quietly tweaking loan spreads to woo new customers while leaving existing borrowers stuck with older, often costlier, terms. The proposed rules, issued for public comments on August 12, 2026, seek to bring uniformity to how banks, NBFCs, cooperative banks, regional rural banks & housing finance companies determine interest rates on both fixed and floating-rate loans.
At the heart of the draft is a requirement that lenders maintain the spread between the benchmark rate and the actual loan rate for a minimum of three years, whether the loan is newly disbursed or has undergone its last rate revision. This effectively closes the loophole many lenders have used to offer sharper deals to fresh borrowers by lowering spreads, without extending the same benefit to those already on their books. Any reduction in non-credit-risk components of the spread before this three-year window will only be allowed for customer retention purposes, & even then, strictly on a non-discriminatory basis. Loans, under the new regime, also cannot be priced below the applicable benchmark rate.
The framework tightens the rules around how often floating rates can be reset. For larger lenders, the benchmark reset frequency cannot exceed three months & must stay fixed through the loan’s tenor. Interest will need to be calculated on a daily reducing balance basis using the actual, day-count convention, & charged on monthly rests — with an exception carved out for specified agricultural advances. Smaller lenders have been given some breathing room, with exemptions from certain provisions.
Commercial banks will continue linking floating-rate personal loans and MSME loans to an external benchmark such as the repo rate, treasury-bill yields, SORR, or rates published by FBIL. Internal benchmarks like the MCLR, meanwhile, will be brought under a stricter, more standardised methodology, addressing what the RBI has flagged as divergent practices among banks in how they currently compute it.
Every regulated entity will now be required to maintain a board-approved policy laying out its methodology for pricing loans, its internal benchmarks, spread components, loan categories, & how pricing powers are delegated internally — a policy that must be reviewed at least once a year. The RBI has also proposed that all floating-rate personal loans and MSME advances offered by banks be linked to an external benchmark, a move designed to sharpen the transmission of monetary policy changes to borrowers.
The draft directions are proposed to take effect from April 1, 2027, with existing loans given until April 1, 2029, to migrate to the new framework. The RBI has invited public comments on the proposal until September 11, 2026, before finalising the rules.
