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.
What’s proposed
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.
Small-ticket loans
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.
Bringing NBFCs under the same APR disclosure and ceiling requirements as banks could also give borrowers a common yardstick to assess the cost of credit. For instance, they could compare a two-week digital fintech loan with a bank credit card or personal loan after accounting for interest, fees and other charges.
BNPL gets checked
Through separate draft directions, the RBI has also proposed restricting NBFCs from offering revolving credit facilities, requiring them instead to provide term loans.
Many apps currently offer revolving credit lines similar to Buy Now, Pay Later (BNPL) products. This means as soon as you pay off a quick two-week loan, the app lets you instantly borrow the money again. Because you pay a fresh fee every single time, you get trapped in a non-stop loop of massive hidden costs.
The RBI has proposed banning such continuous credit lines offered by NBFCs, except where an NBFC is authorized to issue credit cards. Instead, lenders would have to convert them into standard term loans and stop automatically rolling over the debt.
Siddharth Agarwal, founder and MD, Mobicule Technologies, said digital lending's advantage was never just the ease of getting a revolving limit approved instantly but the ability to run the entire credit relationship, from disbursal through repayment, in a more data-driven and responsive way.
“If revolving BNPL-style credit gets constrained, disbursal becomes less of a differentiator and repayment management becomes more of one,” he said and added that lenders will increasingly be judged on how well they handle the life of the loan after the money goes out.
To make sure apps can't find a loophole to overcharge you, the RBI has combined these directions with the daily interest computation rule. In the past, even if you paid back a loan on day 3, lenders would still force you to pay interest for the entire month.
As per RBI’s Fair Practices Code circular released in 2024, the central bank had directed lenders to stop charging interest for periods when a loan was not outstanding. The new draft would go further by standardizing daily reducing-balance calculation and the actual day-count convention across covered lenders.
Lender concerns
The proposed standardization is likely to tighten pricing for high-risk borrowers and has raised concerns among lenders about margin compression.
According to Mangesh Zope, founder of Peaceful-Loans, NBFCs currently use introductory rates to attract customers and later widen spreads. He described this as a "rate bait".
NBFCs also use the spread as a buffer against volatile borrowing costs, Zope said. Locking the spread for three years could remove that buffer, prompting lenders to price new loans higher upfront. Zope believes that this could either result in higher initial rates for NBFC borrowers as lenders take into account their profits and the NPA risk or stricter credit profile requirements.
Nakul Saxena, business head, home loans, Kotak Mahindra Bank, said the RBI’s perspective is clear: the end customer must be the ultimate beneficiary. “Under these new rules, a lender's pricing must strictly align with their actual borrowing costs—meaning whatever your average cost of funds has been over the trailing three months, that real-world rate must be fairly passed on to the borrower,” he said.
Deshpande said the repricing rules would make it harder to widen spreads on existing borrowers while offering sharper rates to new ones, although it would not make the practice impossible.
“If credit risk is the component that moves most freely, lenders will set it conservatively at sanction to cover three years. Borrowers with no repayment history to show will pay for that caution, and under this framework they’ll carry it for three years instead of until the next review,” he added.
Zope agreed that lenders would not simply absorb a hit to margins. Processing fees could rise, starting rates could become less attractive or another charge could appear elsewhere in the loan structure, he said.
What borrowers gain
The draft directions on interest rates on loans and advances are open for public comments until 11 September 2026, while the draft on Non-Banking Financial Companies–Credit Facilities is open for feedback until 28 August.
If implemented, the proposals may not necessarily make loans cheaper. Lenders could price risk more conservatively upfront because they would have to live with the spread for three years. Any margin pressure could consequently surface elsewhere, through higher processing fees or less competitive starting rates.
What the reform could offer borrowers, however, is comparability. If every lender has to break down its spread into the same named components, a borrower could place a bank loan and an NBFC loan side by side and see more clearly what they are actually paying for.
That may be the bigger change: not necessarily cheaper credit, but credit that is easier to understand and compare.