Borrowers with floating-rate loans could get greater protection from changes in the benchmark used to determine their interest rate under a new framework proposed by the Reserve Bank of India (RBI). The draft says existing loans linked to internal or external benchmarks will have to be migrated to the proposed framework with the borrower’s consent, without putting the borrower at a disadvantage.
The RBI has proposed the Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 to create a common framework for how banks and other regulated entities determine loan interest rates, benchmarks and spreads. If finalised, the directions are proposed to take effect from 1 April 2027.
For existing loans, the proposed framework provides for a one-time mapping exercise to migrate loans linked to internal or external benchmarks to the new framework by 1 April 2029. The migration would require the borrower’s consent, and the revised interest rate cannot be higher than the rate applicable immediately before the transition. Lenders also cannot charge a fee for the migration.
What happens if your loan benchmark changes?
For a borrower, the benchmark is important because a floating loan’s interest rate is generally determined using the benchmark plus a spread. A change in the benchmark can therefore affect the effective interest rate, EMI or the time taken to repay the loan.
Under the RBI’s proposed framework, the benchmark, reset frequency and reset date would have to be clearly specified in the loan agreement. For most floating-rate loans, the benchmark reset frequency would not exceed three months. Once the reset frequency is selected, it generally cannot be changed during the loan’s tenure, subject to specified exemptions.
The proposal also puts restrictions on how lenders can alter the spread over the benchmark. The credit-risk premium could be revised only when the borrower’s credit profile changes and after a comprehensive review of the borrower’s credit risk.
Other components of the spread, such as operating costs, term premium and business strategy premium, generally cannot be revised before three years for a floating-rate loan. Lenders can reduce these components earlier for customer retention, provided the reduction is based on justifiable and non-discriminatory grounds.
For borrowers, this means that even if the benchmark itself does not change, lenders would have less flexibility to frequently alter other components that determine the final interest rate.
What if the benchmark is discontinued?
The draft also addresses situations where the benchmark linked to a floating-rate loan is discontinued.
In such a case, the lender would have to replace the benchmark while ensuring that the borrower is not placed at a disadvantage. The loan agreement may also specify a fallback benchmark that would apply if the original benchmark ceases to be available.
This is important because a benchmark-linked loan can continue for several years, while the benchmark itself may eventually be replaced or discontinued. The proposed framework seeks to ensure that such a change does not automatically result in a higher borrowing cost for the customer.
The RBI has also proposed that existing loans linked to internal or external benchmarks be migrated to the new framework through a one-time mapping exercise by 1 April 2029. Borrower consent would be required, and the migration cannot result in a higher interest rate than the rate applicable immediately before the transition. No migration fee can be charged.
What changes for new floating-rate borrowers?
The proposed framework would also make the pricing of new floating-rate loans more transparent.
All floating-rate personal loans and floating-rate loans to MSMEs offered by commercial banks would have to be linked to an external benchmark. Other regulated entities, including NBFCs, regional rural banks and cooperative banks, would have discretion over whether to offer external benchmark-linked floating-rate loans.
External benchmarks could include the RBI policy repo rate, Government of India Treasury Bill yields, the Secured Overnight Rupee Rate or another interest-rate benchmark published by Financial Benchmarks India Pvt Ltd.
The RBI’s proposal is still a draft and could change after the consultation process. Therefore, the proposed protections should not yet be treated as applicable rules for borrowers.
Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.