RBI Proposes Changes To Loan Pricing Rules To Improve Transparency For Borrowers

The Reserve Bank of India (RBI) has proposed a review of the regulatory framework governing interest rates on loans across regulated entities. The move aims to standardise lending practices and create a more uniform framework for loan pricing.

After the August monetary policy committee (MPC) meeting, RBI Governor Sanjay Malhotra said, “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.”

According to the RBI’s Statement on Developmental and Regulatory Policies, the proposed rationalisation of the interest rate framework aims to harmonise guidelines across regulated entities while maintaining proportionality. The central bank also plans to address certain operational aspects of the existing Marginal Cost of Funds-based Lending Rate (MCLR) and External Benchmark-based Lending Rate (EBLR) frameworks.

The RBI said the proposed changes will also focus on standardising certain market practices related to interest charging, including day-count conventions and benchmark reset dates. These measures seek to ensure greater uniformity in loan pricing, enhance transparency, strengthen monetary policy transmission, and improve consumer protection.

The move comes as loan pricing frameworks have evolved significantly over the years. According to a State Bank of India (SBI) report, banks earlier followed the Prime Lending Rate (PLR) system, which was followed by the Base Rate framework introduced in 2010. Later, the RBI introduced the MCLR system in 2016 to link lending rates with banks’ marginal cost of funds.

To improve the transmission of policy rate changes, the RBI introduced the External Benchmark-based Lending Rate (EBLR) system in 2019. The SBI report said that around 67.60 per cent of bank loans are currently under the EBLR regime.

The report further said that the existence of parallel lending rate frameworks has created a need for standardisation. According to the report, bringing greater uniformity in loan pricing practices can help improve transparency for borrowers and strengthen the overall lending framework.

The RBI has said that draft directions incorporating the proposed changes will be issued shortly for public comments. For borrowers, the proposal is aimed at making loan pricing practices easier to understand, though any changes will depend on the final guidelines issued by the RBI after the consultation process.

Apart from reviewing interest rate guidelines on advances, the RBI also announced other regulatory measures in its Statement on Developmental and Regulatory Policies. These include issuing draft guidelines to resume licensing of Urban Co-operative Banks (UCBs) on an ‘on tap’ basis after a two-decade pause on fresh licences.

The central bank also proposed a review of concentration risk management guidelines for rural co-operative banks (RCBs) to address prudential concerns while supporting the growth of the co-operative banking sector.