RBI's new directive for borrowers: Everything from interest rates to EMIs could change
The RBI has proposed new rules for how banks and NBFCs determine loan rates. Here is what will change for floating and fixed-rate loans.
The Reserve Bank of India (RBI) has put forward a new proposal regarding interest rates for borrowers. The central bank has released a draft outlining uniform and clear rules for loan interest rates applicable to all Regulated Entities (REs). The objective is to make the interest rate-setting process transparent for banks and NBFCs and to provide customers with clearer information.
The proposal outlines the method for determining benchmarks and spreads for both fixed and floating-rate loans. This means it will be easier for customers to understand exactly how their loan interest rate is determined.
What is the RBI's new proposal?
Under the new framework, all loans will be linked to a benchmark rate and a fixed spread. This spread will be determined based on the Regulated Entity's board-approved and transparent internal policy. According to the proposal, the loan rate cannot be set lower than the benchmark rate. According to Jefferies, many NBFCs currently offer loans at rates lower than the PLR (Prime Lending Rate); in such cases, they may need to change their benchmark to align with the new framework.
What will change for floating-rate loans?
The RBI has proposed maintaining the linkage to external benchmarks for floating-rate personal and MSME loans offered by banks. It has also proposed standardizing the calculation of MCLR (Marginal Cost of Funds-based Lending Rate). Under this, the proposal suggests calculating MCLR based on the 3-month moving average of the marginal cost of funds for new deposits and borrowings. Additionally, there is a proposal to cap the interest rate reset period for floating-rate loans at a maximum of three months.
How will interest be calculated?
The RBI has also proposed standardizing the method of interest calculation. Under this framework:
Interest will be calculated based on the daily reducing balance.
The 'Actual/Actual' day-count convention is proposed to be implemented.
Interest calculations will involve monthly rests.
For WCDL facilities, fixed-tenure drawdowns may be treated as separate loans for the purpose of determining interest rates and spreads.
Jefferies believes that the implementation of the 'Actual/Actual' day-count convention could initially pose some operational challenges.
What will be the impact on customers and lenders?
According to Citi, the RBI's consolidated framework on interest rate directives aims to strengthen transparency, borrower protection, and rate governance.
Some key changes proposed include:
| Proposed Change | What It Means |
|---|---|
| Spread Revision | Non-CRP spread components will remain locked for 3 years; CRP can be changed only when the borrower’s credit profile changes. |
| APR Cap | A maximum APR limit will be set for microfinance and small-value retail loans of up to ₹50,000. |
| Day-Count | The Actual/Actual convention will be standardized. |
| Reset Period | For floating-rate loans, the reset period will be capped at a maximum of 3 months. |
| MCLR | It will be calculated based on the average marginal cost of new deposits and borrowings over the previous 3 months. |
The APR cap could put pressure on the earnings of lenders who rely on high-yield, small-ticket loans. Additionally, compliance costs and operational complexities might increase initially. However, the proposal allows lenders time to prepare, with a transition deadline set for April 29.
