RBI drafts rules to lock loan spreads and standardise rate setting across lenders

The Reserve Bank of India has issued draft rules aimed at harmonising how interest rates are set by banks, non-bank finance companies and cooperative lenders. Interest on advances must be computed on a daily reducing balance using the actual/actual day-count convention, with monthly rests applied to most loans. For floating-rate products, the benchmark may be reset no more often than every three months and must remain fixed for the loan’s duration.

The spread between the benchmark and the loan rate is to stay constant for at least three years, and only the credit-risk premium can be adjusted if a documented change in the borrower’s risk profile occurs. Non-credit components of the spread are barred from increase during the three-year period, though reductions are allowed for customer retention on a non-discriminatory basis. Smaller lenders, including regional rural banks with deposits up to Rs 1,000 crore and certain base-layer NBFCs, are exempt from some of the stricter reset and freeze requirements, and all internal benchmark methodologies must be publicly disclosed.