RBI issues directions on fixed, floating rate loans

The Reserve Bank of India (RBI) has released a draft framework to standardize interest rate determination for both fixed and floating-rate loans. This proposal, open for public feedback, would apply to a wide range of financial institutions, including commercial banks, regional rural banks, urban and rural cooperative banks, all-India financial institutions and non-banking financial companies.

For floating-rate loans, the RBI suggests using an internal or external benchmark, plus a risk-based spread, to determine the interest rate. The reset period for these benchmarks should not exceed three months for most floating-rate loans. However, if the reset period is less than a month, it should reset on the due date, while for other cases, it should reset on the first day of the month when the reset is due.

The draft specifically mentions personal loans and MSME (Micro, Small, and Medium Enterprises) loans, requiring commercial banks to link these floating-rate loans to an external benchmark. For existing loans, a one-time mapping exercise will be conducted by April 1, 2029.

If a lender changes the benchmark for a floating-rate loan without the borrower's consent, the borrower cannot be disadvantaged. The new rate cannot exceed the previous rate, and no fees can be charged for the migration. If the benchmark used for a floating-rate loan becomes unavailable, the lender must shift to another benchmark without negatively impacting the borrower, potentially through a fallback option.