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The Reserve Bank of India (RBI) has proposed a new harmonised framework for interest rates on loans and advances extended by regulated entities. The RBI draft rules are aimed at improving monetary policy transmission, ensuring appropriate pricing of credit risk and promoting fair treatment of borrowers.
The central bank issued the draft guidelines on Wednesday under the proposed “Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026.” The proposal follows the developmental and regulatory policies statement issued by the RBI on August 5, 2026.
The RBI draft rules seek to establish a principles-based framework covering both fixed-rate and floating-rate loans across different categories of regulated entities.
1. Floating-Rate Loans to Reset Within Three Months
One of the key proposals under the RBI draft rules is a new requirement for floating-rate loans.
From April 1, 2027, all floating-rate loans would be required to reset within a maximum period of three months. The proposal is intended to strengthen the transmission of changes in monetary policy rates to lending rates.
Under a floating-rate loan arrangement, the interest rate can change based on an applicable benchmark. Faster transmission can allow borrowers and lenders to see changes in borrowing costs more efficiently when benchmark rates change.
The proposed three-month maximum reset period is therefore an important element of the new framework.
2. MCLR Calculation Framework to Be Revised
The RBI draft rules also propose changes to the calculation of the Marginal Cost of Funds Based Lending Rate, commonly known as MCLR.
Under the proposed framework, MCLR calculations would use a three-month moving average of the weighted cost of fresh deposits and fresh borrowings.
The change is intended to bring greater consistency to internal benchmark calculations across commercial banks.
The RBI has observed divergent practices among commercial banks when determining internal benchmarks such as MCLR. A more standardised methodology could help improve transparency and consistency in the pricing of credit.
3. Common Framework for Regulated Entities
The RBI draft rules seek to harmonise the regulatory framework for interest rates across different categories of regulated entities.
At present, regulatory instructions relating to interest rates on advances differ depending on the type of institution. Commercial banks, including Small Finance Banks and Local Area Banks, have specific frameworks covering internal and external benchmark-based lending.
Other regulated entities, including Non-Banking Financial Companies, All India Financial Institutions, Regional Rural Banks, Urban Cooperative Banks and Rural Cooperative Banks, have different regulatory provisions, particularly concerning conduct-related matters.
The proposed framework aims to establish broader principles that can apply across these categories while retaining entity-specific requirements where necessary.
4. Greater Protection for Floating-Rate Borrowers
Another important feature of the RBI draft rules concerns the revision of spreads on floating-rate loans.
The proposal states that non-credit-risk components of the spread on floating-rate loans cannot be revised for three years.
This could provide borrowers with greater predictability regarding the interest rates they pay during the loan period.
At the same time, the Credit Risk Premium would be treated differently. According to the proposed framework, it could be changed when there is a change in the borrower’s credit profile.
This distinction is intended to ensure that changes in borrowing costs linked to genuine credit-risk developments can still take place while preventing arbitrary revisions to other components of the lending spread.
5. Existing Floating-Rate Loans to Move to New Structure
The RBI draft rules also address existing floating-rate loans.
Existing floating-rate loans would need to migrate to the revised structure by April 1, 2029. The migration would require borrower consent and would have to take place without additional fees or an increase in the interest rate solely because of the transition.
This provision could be particularly relevant for existing borrowers whose loans were sanctioned under earlier regulatory frameworks.
The transition period gives regulated entities time to make the necessary operational and technological changes while providing borrowers with a defined timeline for migration.
6. Focus on Fair Treatment of Borrowers
Fair treatment of borrowers is one of the central objectives behind the RBI draft rules.
The central bank said the proposed directions are intended to create a framework that supports effective monetary policy transmission, appropriate pricing of credit risk and fair treatment of borrowers.
A more transparent approach to interest-rate determination could help borrowers better understand how lending rates are calculated and why their borrowing costs change.
The framework could also encourage regulated entities to follow more consistent practices when setting interest rates and calculating spreads.
For borrowers, greater clarity around benchmark rates, spreads and credit-risk premiums can make loan pricing easier to assess.
7. Public Feedback Invited Until September 11
The RBI has invited stakeholders and members of the public to submit comments and feedback on the RBI draft rules.
Feedback can be submitted through the central bank’s Connect 2 Regulate portal or by email. The deadline for submissions is September 11, 2026.
The RBI will examine the feedback before issuing the final directions.
The final directions will be issued separately for each category of regulated entity. This means the final framework could contain specific provisions depending on whether the institution is a commercial bank, NBFC, cooperative bank or another regulated entity.
The consultation process gives banks, financial institutions, industry participants and borrowers an opportunity to raise concerns or suggest changes before the rules are finalised.
Why the RBI Draft Rules Matter
The proposed RBI draft rules could have a broad impact on India’s lending ecosystem.
Interest rates influence the cost of home loans, personal loans, business loans, vehicle finance and other forms of credit. Changes in the way lending rates are calculated and reset can therefore affect both borrowers and financial institutions.
For banks, the proposed framework could require changes to internal systems, benchmark calculations and loan documentation.
For borrowers, the emphasis on transparency and restrictions on certain spread revisions could provide greater clarity regarding how their loan rates are determined.
The proposed changes are also intended to improve monetary policy transmission. When the RBI changes policy rates, the effect on borrowing costs can take time to reach consumers and businesses. A more harmonised framework could help make this transmission more efficient.
Impact on Monetary Policy Transmission
The RBI draft rules are closely connected with the central bank’s objective of improving monetary policy transmission.
When policy rates change, banks and other lenders adjust their lending rates based on applicable benchmarks and internal pricing mechanisms.
If those mechanisms operate differently across institutions, the impact of monetary policy changes may not be transmitted uniformly.
The proposed framework could help create greater consistency in the way lending rates respond to changes in funding costs and other relevant factors.
This could be important for both borrowers and policymakers because lending rates influence household spending, business investment and overall economic activity.
What Borrowers Should Watch
Borrowers with floating-rate loans should pay attention to how the proposed framework develops during the consultation process.
The proposed April 1, 2027 deadline for the new floating-rate reset framework and April 1, 2029 deadline for migration of existing loans are particularly important dates.
However, these are part of the draft framework and should not be treated as final until the RBI completes its consultation and issues the final directions.
Borrowers should also monitor how their lenders communicate changes to benchmarks, spreads and other components of loan pricing.
What Happens Next?
The next stage will be the public consultation process. Stakeholders can submit their feedback until September 11, 2026.
The RBI will then consider the suggestions and concerns received before issuing final directions for different categories of regulated entities.
The final rules could contain modifications based on the feedback received during the consultation.
Until the final directions are issued, banks, NBFCs and other regulated entities will continue operating under the applicable existing regulatory framework.
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