Mumbai: The Reserve Bank of India on Wednesday proposed in draft guidelines that regulated entities declare their lending rate on the first of every month, reset floating rate loans at least once in three months, and cap total charges (including interest rate and fee) for microfinance and small-value loans.
In the new draft norms on interest rates, the banking regulator has harmonised 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.
The guidelines follow RBI's announcement after its monetary policy review earlier this month. Public comments on the draft guidelines are being sought by September 11. The final guidelines shall come into effect from April 1, 2027.
Regulated entities, which include banks and NBFCs, have been given the freedom to choose between an internal or external benchmark, plus a risk-based spread. For agricultural loans, the periodicity of reset shall be linked to crop season but not more than 12 months.
"Interest shall be computed on a daily reducing balance basis with actual day count followed for computation of interest. The RE shall explicitly put a ceiling on the annual percentage rate inclusive of interest rate and all other charges / fees on microfinance loans and small value loans while ensuring that these are not usurious," the RBI said.
The RBI has included personal loans, where the principal amount does not exceed ₹50,000, in small value loans. The internal benchmark for a commercial bank, regional rural banks (RRBs), and urban co-operative banks (UCBs) in Tier 3 & 4 towns shall be based on the marginal cost-based lending rate (MCLR), calculated as a moving average of the marginal costs of domestic deposits and borrowings for the bank during the trailing 3-month period. These banks having total deposits of more than ₹1,000 crore shall publish the internal benchmark on the first calendar day of each month.
All floating rate personal loans and floating rate loans extended to MSMEs by commercial banks shall be linked to an external benchmark, the RBI said.
REs shall determine the spread and its components in accordance with their policy that should lay down the methodology, component and range of spread for different loan categories.
The spread shall comprise of credit risk premium (CRP) and one or more other components like operating cost, term premium and business strategy premium which includes considerations like competition, liquidity, expected returns, and other commercial considerations. Components of the spread other than the CRP shall not be revised before three years for a floating rate loan.
"The components of the spread may be positive or zero. However, the CRP shall be positive (i.e., it shall not be zero). CRP shall be revised only when the borrower's credit profile undergoes a change, in accordance with its policy and terms of the loan agreement. It shall also be preceded by a comprehensive review of the borrower's credit risk profile in accordance with the RE's policy," RBI said.
REs have been given the flexibility to reduce components of the spread for a loan category before the three year period, on justifiable grounds.
