New RBI Regulations Aim to Standardize Loan Rate Setting Across Banks and NBFCs
MUMBAI: New draft regulations from the Reserve Bank of India (RBI) may change how lenders set interest rates on loans. The proposed rules aim to standardize interest-rate calculations across banks, non-banking financial companies (NBFCs), and cooperatives. Under these guidelines, lenders will be required to maintain the spread between the benchmark rate and the loan rate for a minimum of three years.
The draft framework mandates that interest on loans be calculated on a daily reducing balance basis, using the actual/actual day-count convention. Monthly rests will apply to most advances, with exceptions for specific agricultural loans. Smaller lenders will receive exemptions from certain requirements.
For floating-rate loans, major lenders must reset their benchmark rates no more than every three months, and these rates must remain fixed for the duration of the loan. The draft also establishes uniform parameters for spread components, stipulating that non-credit risk components cannot be altered for three years. Changes to the credit risk premium will only be permitted following a documented review of the borrower’s credit profile. Lenders can reduce spread components earlier for customer retention, but must do so on a non-discriminatory basis. Loans cannot be priced below the applicable benchmark.
Commercial banks will continue to link floating-rate personal loans and loans to micro, small, and medium enterprises (MSMEs) to an external benchmark, such as the repo rate or treasury-bill yields. Internal benchmarks like the Marginal Cost of Funds based Lending Rate (MCLR) must adhere to a stricter methodology, based on a three-month moving average of the annualized weighted average cost of fresh domestic deposits and borrowings. This calculation must be system-generated and independently verifiable.
For NBFCs, cooperative banks, regional rural banks (RRBs), and all-India financial institutions (AIFIs), linking floating-rate loans to an external benchmark will remain optional. These lenders can choose to link loans to either internal or external benchmarks. Smaller lenders, including regional cooperative banks with deposits up to Rs 1,000 crore, Base Layer NBFCs, and Tier 1 and Tier 2 urban cooperative banks, will be exempt from the three-month reset frequency and the three-year freeze on revisions to non-credit risk components of spreads. The methodology for calculating internal benchmarks must also be publicly disclosed, and loan agreements must specify the benchmark, reset periodicity, and reset dates.
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