RBI invites public comments on draft rules to standardise how lenders set interest rates
The Reserve Bank of India (RBI) released draft directions proposing a harmonised framework for how banks, NBFCs and other regulated entities determine interest rates on both fixed-rate and floating-rate loans
The draft standardises benchmark-linked lending: any loan, fixed or floating, must be priced with reference to an internal or external benchmark plus a risk-based spread, and lenders cannot price a loan below the applicable benchmark
The framework is intended to address operational inconsistencies that persist under the existing Marginal Cost of Funds-based Lending Rate (MCLR) and External Benchmark Lending Rate (EBLR) regimes, and to standardise divergent interest-charging practices across regulated entities
The proposed directions are to take effect from 1 April 2027, with public comments invited through the RBI's website and by email, with the comment window closing 11 September 2026
Evolution of Bank Lending Rate Regimes: Base Rate to MCLR to EBLR
India's benchmark for bank lending rates has been revised three times to improve monetary policy transmission — the speed and extent to which RBI's repo rate changes pass through to actual borrower interest rates. Each regime replaced its predecessor because transmission remained slow or opaque.
Key Details
- Base Rate (introduced July 2010, replaced the earlier Benchmark Prime Lending Rate/BPLR system): minimum rate below which banks could not lend, based largely on average cost of funds; reviewed quarterly
- MCLR — Marginal Cost of Funds-based Lending Rate (effective April 2016): an internal benchmark based on marginal (incremental) cost of funds, meant to transmit rate changes faster than the Base Rate
- EBLR — External Benchmark Lending Rate (mandated effective 1 October 2019): RBI required banks to link floating-rate retail and MSME loans to an external, publicly observable benchmark — typically the RBI repo rate, or 3-month/6-month Treasury Bill yields published by Financial Benchmarks India Ltd (FBIL) — to improve transmission speed and transparency
- RBI data shows the share of outstanding floating-rate loans linked to EBLR rose sharply after 2019, improving repo-rate transmission compared to the MCLR era
The new draft framework is the next step in this transmission-improvement lineage — it extends benchmark-linked, spread-based pricing discipline to fixed-rate loans as well and harmonises practice across all regulated lenders (banks and NBFCs alike), not just banks.
RBI's Regulatory Mandate over Interest Rate Determination
RBI's power to regulate how banks and NBFCs price loans flows from its statutory mandate under the Banking Regulation Act, 1949 and the RBI Act, 1934, exercised through binding "directions" (as opposed to advisory guidelines) — a legally enforceable regulatory instrument.
Key Details
- RBI issues "Master Directions" that consolidate all current instructions on a subject and carry statutory force; draft directions go through a public consultation process before finalisation
- The current draft covers all "regulated entities" — commercial banks, cooperative banks, and non-banking financial companies (NBFCs) — reflecting RBI's harmonisation push across bank and non-bank lenders that has intensified since NBFC prudential norms were tightened following the 2018-19 IL&FS crisis
- Public comment period is a standard RBI rule-making step, typically 3-6 weeks, before directions are finalised and notified
The comment window (closing 11 September 2026) and the deferred effective date (1 April 2027) reflect RBI's standard consultative process for major regulatory changes affecting lender-borrower interest rate practices.
Monetary Policy Transmission and the Repo Rate Linkage
Monetary policy transmission is the mechanism by which changes in the RBI's policy repo rate (set by the Monetary Policy Committee) flow through to the actual lending and deposit rates charged by banks. Weak or delayed transmission blunts the effectiveness of monetary policy in controlling inflation or supporting growth.
Key Details
- Repo rate is the rate at which RBI lends short-term funds to banks against government securities; it is the primary tool of the Liquidity Adjustment Facility (LAF)
- Under EBLR, since most retail/MSME floating loans are linked directly to repo rate, RBI rate cuts or hikes are supposed to transmit to EMIs within a defined reset period (usually 3 months)
- Under the older MCLR regime, transmission lagged because MCLR moved only gradually with banks' own cost of deposits
By mandating that even fixed-rate loans reference a benchmark plus spread, and by standardising rules across banks and NBFCs, the draft framework aims to close remaining transmission gaps that persisted despite the 2019 EBLR mandate.
- Proposed effective date of new interest rate framework: 1 April 2027
- Public comment deadline: 11 September 2026
- Base Rate regime: 2010-2016; MCLR regime: 2016-2019; EBLR regime: from 1 October 2019
- EBLR-linked floating loans as share of outstanding loans rose from about 2.4% (September 2019) to about 28.5% (March 2021), per RBI data on monetary transmission
- Regulated entities covered: commercial banks, cooperative banks, and NBFCs
- A lender cannot price a loan below the applicable benchmark rate under the proposed framework