Summary of this article
RBI proposes maximum three-month resets for floating-rate loans.
Faster resets could transmit both rate cuts and hikes.
Spread components may face restrictions on changes for three years.
The Reserve Bank of India (RBI) has proposed changes to how lenders revise interest rates on floating-rate loans. Under the draft rules, lenders would have to reset these rates at least once every three months.
The proposal is still under consultation. The RBI has invited comments until September 11, 2026. If finalised, the rules will apply from April 1, 2027.
What Is The Proposed Change
The three-month reset rule is particularly relevant for loans linked to internal benchmarks such as the Marginal Cost of Funds Based Lending Rate (MCLR).
At present, MCLR-linked loans can have reset periods of up to one year, depending on the terms of the loan. External benchmark-linked loans, including those linked to the repo rate, already have to be reset at least once every three months.
Ashraye Lalani, director, MegaCorp, points out that longer reset cycles can impact borrowers beyond home loans. “At present, a significant number of floating-rate borrowers with regard to personal loans or pre-2019 MCLR-linked housing loans are in the reset cycle that may take place once a year or even less frequently”, states Lalani.
The proposed framework would bring the reset period for floating-rate loans to a maximum of three months.
How Will The Change Impact Borrowers
The reset period determines how quickly a change in the benchmark reaches the interest rate on a loan.
For example, if the benchmark falls soon after an MCLR-linked loan has been reset, the borrower may have to wait for the next reset to benefit from the lower rate. A shorter reset period could reduce this waiting time.
Lalani highlights an important distinction: “Borrowers should not confuse faster transmission with lower rates. The RBI is not reducing borrowing costs through this proposal; it is ensuring that the rates borrowers are entitled to receive are passed on without unnecessary delays in the lender's reset cycle.”
The same applies when rates rise. A higher benchmark may be reflected in the loan rate sooner. Depending on the loan terms, this could increase the equated monthly instalments (EMI), extend the repayment period or both.
“Borrowers should remember that faster transmission works both ways. While rate cuts will reach borrowers sooner, rate hikes will also be reflected more quickly in EMIs or loan tenures,” Lalani says. He adds that longer reset cycles previously provided “a temporary cushion” before higher rates took effect.
Proposed Changes To The Spread
A floating-rate loan generally consists of a benchmark rate plus a spread charged by the lender.
Lalani explains the distinction, “The RBI is separating the benchmark from the spread. Lenders have historically used the ‘spread’ as a lever to quietly reprice risk without touching the headline benchmark. Under the new rules, the credit-risk premium can only move on an actual credit review, and everything else in the spread ... is frozen for three years.”
The draft proposes tighter rules for changing this spread. The credit-risk premium can be revised when there is a change in the borrower’s credit profile. Other components of the spread generally cannot be changed for three years, except in specified cases.
This restriction is separate from movements in the benchmark. The loan rate can still rise or fall when the benchmark changes.
What Will Happen To Existing Loans
Existing floating-rate loans linked to internal or external benchmarks would have to be moved to the new framework through a one-time mapping exercise by April 1, 2029.
The borrower’s consent would be required for the switch. Lenders cannot charge a fee for the migration or increase the interest rate simply because the loan is being moved to the new framework.
For existing borrowers, there will be no immediate EMI change merely because of the proposal. The actual impact will depend on the final rules, the benchmark and future interest-rate movements.
