RBI Moves to Rationalise Interest Rate Rules for Lenders

The Reserve Bank of India on Wednesday proposed a broad overhaul of the rules governing how banks and other regulated entities set interest rates on loans. Governor Sanjay Malhotra said the goal is to improve transparency in loan pricing, strengthen the transmission of monetary policy, and give consumers clearer terms.

The proposal would replace the current patchwork of guidelines with a single principle-based framework that applies to all regulated entities. That includes banks, non-bank lenders, and housing finance companies. The RBI said it wants to standardise practices such as the day count convention used to calculate interest and the dates on which benchmark rates are reset. It also aims to address operational issues with the existing Marginal Cost of Funds Based Lending Rate (MCLR) system and the External Benchmark Based Lending Rate (EBLR) regime.

“To enhance transparency in lending rates and strengthen consumer protection, it is proposed to harmonise and standardise the regulatory framework on interest rates on advances for all regulated entities,” Malhotra said in his statement accompanying the third bi-monthly monetary policy review of the current fiscal year.

The shift is not entirely new. The RBI had already directed banks to link all new floating-rate loans for housing, auto, and small businesses to an external benchmark – typically the repo rate – starting in October 2019. That move was meant to ensure that changes in the central bank’s policy rate fed through to borrowers more quickly. Banks were required to reset those rates at least once every three months. The external benchmarks allowed under that rule include the repo rate, the 91-day Treasury bill yield, the 182-day T-bill yield, or any benchmark published by the Financial Benchmarks India Private Ltd.