RBI wants lenders to show their cards. What will change for borrowers?

The RBI's latest proposal aims to revolutionize loan pricing by introducing a standardized framework for banks and NBFCs.SummaryThe RBI wants banks and NBFCs to follow clearer rules on loan spreads, rate revisions and APRs. The changes could make borrowing easier to compare, but may also push lenders to price risk upfront.Gift this articleCheck your portfolioThis is a Mint Premium article gifted to you.Subscribe to enjoy similar stories.

In a move aimed at making loan pricing more transparent and interest rates easier to compare, the Reserve Bank of India (RBI) has proposed a common framework for how banks and non-banking financial companies (NBFCs) determine and revise the spread charged over benchmark rates on retail, personal and business loans.

Currently, banks largely decide spreads over benchmark rates through their internal policies, while NBFCs can also choose their own benchmarks. This has resulted in different pricing methods across lenders, making it difficult for borrowers to compare loans.

For floating-rate retail loans—typically home loans—and MSME loans, banks are required to use an external benchmark such as the repo rate, Government of India Treasury Bill yields, Secured Overnight Rupee Rate (SORR), or another Financial Benchmarks India Pvt. Ltd. (FBIL) benchmark. Banks largely fund themselves through RBI-regulated deposits, making their funding costs more closely linked to policy rates.

NBFCs and housing finance companies (HFCs), however, have greater pricing flexibility because they rely more heavily on wholesale funding, whose costs can be more volatile and may not move in line with the repo rate.

This can leave borrowers facing opaque pricing, unexplained rate changes and delayed transmission when interest rates fall. The RBI's proposed framework seeks to address this.

Through draft directions released earlier this month, the central bank has proposed a unified, enforceable framework from 1 April 2027 covering regulated entities (REs), including commercial banks, cooperative banks and NBFCs.

A floating loan rate typically comprises a benchmark rate and a spread. For example, if the benchmark is 5.25% and the lender charges a 2% spread, the borrower’s lending rate would be 7.25%. The spread can include a credit risk premium, operating costs and other commercial considerations.

One of the key proposals is that non-credit-risk components of the spread cannot be changed for three years. The credit-risk premium, however, can be revised if the borrower’s credit profile changes, subject to a thorough review.

For floating-rate loans, lenders could also be required to pass on benchmark rate revisions to borrowers within a maximum of three months, ensuring faster transmission. Agriculture loans, smaller rural and urban cooperative banks and Base Layer NBFCs are excluded from this requirement.

Lenders will continue to determine spreads and their components according to their own policies. However, those policies must specify how each component is calculated and the range of spreads applicable to different loan categories. The RBI has proposed that the spread comprise a credit-risk premium and one or more other components.

Rajat Deshpande, CEO and co-founder of Finbox, said the changes could make pricing easier to understand.

“Breaking the spread into named components, such as credit risk premium, operating cost, term premium, business strategy premium, makes comparing that of banks and NBFCs, possible for the first time,” he said, adding that the draft standardizes how pricing gets disclosed more than what gets charged.

For personal loans of up to ₹50,000, the RBI has proposed a board-approved ceiling on the annual percentage rate (APR) to prevent borrowing costs from becoming unfairly high. APR represents the total annual cost of a loan, including interest and other charges, expressed as a single percentage.

Vinod Kothari, a financial consultant, said the proposal could concern lenders operating in the small-ticket credit segment, but should benefit borrowers by placing responsibility for pricing at the board level and requiring lenders to follow a disciplined methodology rather than arbitrary pricing.