RBI issues draft rules on harmonised interest rate determination for Banks, NBFCs

In order to align the policies between Banks and non-banking finance companies (NBFCs), the Reserve Bank of India (RBI) has issued draft rules on harmonised interest rate determination. Currently, the regulatory framework on interest rates on advances is applicable only to commercial banks, while NBFCs are governed largely by conduct-related aspects. To align the policies between banks and NBFCs, RBI has prescribed a broad, principles-based framework for the determination of interest rates on both fixed rate and floating rate loans, commensurate with the nature, complexity, and scale of the operations of the regulated entity. 

These directions will be called as ‘Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026’ and are proposed to come into effect from April 1, 2027. The directions will apply only to domestic operations of the regulated entities, and require all regulated entities to have board-approved policies on interest rates on loans and advances, which should be reviewed at least once every year. RBI noted that this policy shall lay down various aspects related to pricing of loans, including microfinance loans. Such aspects shall, inter alia, include the methodology for determining interest rates, including defining the internal benchmark, the components of the spread, the loan categories, and the delegation of powers for loan pricing.

Moreover, a regulated entity shall explicitly put a ceiling on the Annual Percentage Rate (APR), inclusive of the interest rate and all other charges/fees on microfinance loans and small value loans, while ensuring that these are not usurious. For fixed-rate loans, a regulated entity shall determine the interest rate on a fixed-rate loan with reference to its internal benchmark or an external benchmark, plus a risk-based spread; while for floating-rate loans, a regulated entity shall determine the interest rate with reference to its internal benchmark or an external benchmark, plus a risk-based spread.