RBI's New Draft Bars Loan-Rate Hikes on Benchmark Swaps

The Reserve Bank of India has published draft rules for floating-rate loans that stop a benchmark change from pushing a borrower's EMI higher. The Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026, create a common framework for banks, non-bank finance companies and other regulated entities to determine loan benchmarks, interest rates and spreads. Implementation is set for 1 April 2027, subject to consultation.

Existing loans linked to internal or external benchmarks face a one-time mapping exercise to move them into the new framework. The deadline is 1 April 2029. Borrower consent is mandatory, the revised rate cannot exceed the rate in place immediately before the transition, and the draft prohibits lenders from charging a migration fee. The exercise covers loans tied to external rates and to a lender's own internal benchmarks.

A floating loan's rate is the benchmark plus a spread. A change in benchmark shifts the effective rate, the EMI or the time to repay the loan. The draft requires the benchmark, reset frequency and reset date to be specified in the loan agreement. For most floating-rate loans, the reset frequency is capped at three months. Once selected, the reset frequency generally stays for the loan's tenure, with only specified exemptions.

The spread over the benchmark gets its own restrictions. Lenders can revise the credit-risk premium only when the borrower's credit profile changes and after a detailed credit-risk review. Other spread components, including operating costs, the term premium and the business strategy premium, generally stay fixed for three years on a floating-rate loan. Lenders can reduce those components earlier for customer retention, provided the reduction is justifiable and non-discriminatory.