The Reserve Bank of India has proposed new rules that will change how banks set interest rates on floating loans. If approved, the rules will start on 1 April 2027 and could affect the monthly payments of many borrowers.
Under the draft, every floating personal loan and every floating loan given to MSMEs by commercial banks will have to be tied to an external benchmark. This means the base rate that banks use will be a publicly available index rather than an internal figure.
Borrowers will see clearer links between the benchmark rate and their loan rate. The draft requires that the benchmark, the reset frequency and the reset date be written in the loan agreement. The rate can be reset at most once every three months, and the chosen frequency will stay the same for the life of the loan, except for a few exceptions.
The new rules also tighten how much extra a lender can add over the benchmark – the spread. The spread may include a credit‑risk premium, operating costs, a term premium and a business‑strategy premium. The credit‑risk premium can only be changed when the borrower’s credit profile changes and after a full review. The other parts of the spread cannot be altered for at least three years on a floating loan.
For home‑loan and other floating‑rate borrowers, this means that even if the benchmark stays flat, the spread can still change the effective interest rate and the EMI. Banks will now have to follow a documented method for setting the spread and its parts, giving borrowers more transparency.
Existing borrowers are protected during the transition. Loans that are already linked to an internal or external benchmark must be moved to the new framework by 1 April 2029. The move must be done with the borrower’s consent, must not disadvantage the borrower, and the RBI says no migration charges will be imposed.
Overall, the draft aims to give borrowers clearer information about what drives their loan rate, when it can change, and how much of it relates to their own credit risk. However, because the rules are still a draft, borrowers should wait for the final version before assuming these provisions will apply exactly as outlined.