Issued by the Reserve Bank of India (RBI) on August 12, 2026. This is a consultation draft — comments are open until September 11, 2026. As drafted, the Directions propose a commencement date of April 1, 2027, but nothing in this document is currently binding.
Quick Reference
RBI's Draft Interest Rates on Loans and Advances Directions, 2026
For years, how a bank prices a loan and how an NBFC prices the same kind of loan have been governed by different rulebooks, built up circular by circular, entity type by entity type. RBI's new draft — the Interest Rates on Loans and Advances Directions, 2026 — proposes to collapse that patchwork into a single, principles-based framework that applies to virtually every regulated lender in the country, from the State Bank of India down to a Base Layer NBFC.
The trigger, as RBI's accompanying press release explains, is a mix of gaps and inconsistencies in the existing regime: fixed rate loans have had very little regulatory guidance at all, while banks have shown divergent practices in how they compute their MCLR (marginal cost of funds based lending rate) and its components. Meanwhile, NBFCs, AIFIs, RRBs, UCBs and RCBs have mostly been governed by conduct-related instructions rather than a substantive interest-rate framework. This draft is RBI's attempt to fix both problems at once — extending real substance to fixed rate loan pricing, and bringing every RE under one broadly consistent (though proportionate) methodology.
Crucially, this is a consultation draft released on August 12, 2026, not a final rule — comments are open until September 11, 2026. RBI has been explicit that a single combined draft is being circulated now purely for feedback; once comments are reviewed, separate final Directions will be issued for each category of RE. That means the substance below is highly likely to survive in some form, but the exact wording, thresholds, and even some obligations could still change before anything becomes binding.
Who Would This Draft Apply To?
The draft defines six categories of "Regulated Entity" (RE), and — notably — brings all of them, not just banks, under one document for the first time:
Including Small Finance Banks, Local Area Banks, corresponding new banks, and SBI.
As defined under the Banking Regulation Act, 1949.
Primary Co-operative Banks under the Banking Regulation Act, 1949.
State and Central Co-operative Banks under the NABARD Act, 1981.
EXIM Bank, NABARD, NaBFID, NHB, and SIDBI.
Including Housing Finance Companies.
One limiting proviso worth flagging early: the draft states it would apply only to the domestic operations of REs — offshore branches and foreign operations fall outside its scope.
The Key Terms This Draft Runs On
The draft's Chapter I sets out eleven defined terms that recur throughout the document. Getting these right matters, because several operative obligations turn entirely on which bucket a loan falls into.
A "benchmark" is simply the reference rate a loan's interest rate is pegged to. An external benchmark is one set outside the lender entirely — the RBI Repo Rate, government T-Bill yields, the Secured Overnight Rupee Rate (SORR), or another FBIL-published rate. An internal benchmark is one the lender calculates itself, based on its own cost of funds — this is what MCLR is.
Think of the benchmark as the lender's "cost price" for money, and the spread as the markup on top of it that covers credit risk, operating costs, and the lender's margin. The draft is explicit that the spread must not include separate charges or fees — those are accounted for elsewhere (and, for small loans, are capped separately — see below).
The remaining definitions are more mechanical, but still consequential: a fixed rate loan keeps its interest rate constant for the entire tenor, while a floating rate loan changes primarily through benchmark resets. "Rests" refers to how often interest is charged to a borrower's account — separate from when repayments actually fall due. Microfinance loans and personal loans take their meaning from other RBI frameworks (the Commercial Banks – Credit Facilities Directions, 2025, and Banking Statistics I, respectively), and MSMEs follow the MSMED Act, 2006 definition.
What Governance Does an RE Need to Put in Place?
Chapter II opens with a Board-level obligation: every RE must have a comprehensive, Board-approved (or Board-committee-approved) policy on interest rates covering all its lending, including microfinance loans. That policy has to spell out the methodology for setting rates, how the internal benchmark is defined, what makes up the spread, how loan categories are defined, and who within the organisation has delegated authority to price a loan. The policy must be reviewed at least once a year.
How Must Interest Actually Be Charged and Computed?
Beyond governance, the draft locks down the mechanics of interest computation:
- Interest on advances must generally be charged at monthly rests.
- For agricultural advances, long-duration crop loans use annual rests, while short-duration crop loans follow repayment due dates aligned to the crop season — and compounding only kicks in once a repayment becomes overdue.
- Interest must be computed on a daily reducing balance basis, using the Actual/Actual day-count convention.
REs must explicitly cap the Annual Percentage Rate (APR) — interest plus all other charges and fees combined — on microfinance loans and on "small value loans," while ensuring these are not usurious. A small value loan is defined as a personal loan where the principal does not exceed ₹50,000.
For short-term agricultural loans and advances to small and marginal farmers (original tenor up to one year), total interest plus all other charges and fees cannot exceed the principal amount of the loan — a borrower can never end up owing more in interest-and-charges than they originally borrowed.
How Will Fixed Rate Loans Be Priced?
Fixed rate loans have historically had almost no dedicated pricing rules — this draft changes that. Fixed rate loans must be priced with reference to the RE's internal or external benchmark, plus a risk-based spread, and an RE cannot price any loan below the applicable benchmark itself. Under the draft, fixed rate loans are brought onto essentially the same pricing logic as floating rate loans, minus the periodic resets.
How Will Floating Rate Loans Be Priced and Reset?
Floating rate loans follow the same benchmark-plus-spread logic, but with added rules around resets, since the whole point of a floating loan is that its rate moves. Every loan agreement must explicitly state the benchmark used, the reset periodicity, and the reset date.
Reset periodicity is simply how often the lender re-checks the benchmark and updates the loan's interest rate accordingly — say, every month or every three months. Once chosen for a specific loan, the draft requires that periodicity to stay fixed for the loan's entire tenor; a lender can't quietly switch a borrower from quarterly to monthly resets mid-loan.
What Is the New Internal Benchmark (MCLR) Framework?
For commercial banks, RRBs, UCBs in Tier 3 & 4, and RCBs with total deposits above ₹1000 crore, the draft mandates that the internal benchmark be based on the marginal cost of funds — with the resulting rate called the marginal cost based lending rate (MCLR). Other REs may determine their own internal benchmark using marginal cost of funds as the basis, following a methodology documented in their own policy, but this is optional rather than mandatory for them.
Whatever methodology an RE uses to set its internal benchmark, the draft requires that methodology to be publicly disclosed — on the RE's website or app if it has one, or at its physical branches if it doesn't. This applies to every disclosure the Directions mandate, not just the benchmark methodology.
Marginal cost of funds asks: "what would it cost me, right now, to raise one more rupee of deposits or borrowings?" — rather than looking at the average cost of money already on the books. The draft's Annex I sets out the exact calculation: it's a moving average of the annualised, weighted cost of fresh deposits and borrowings raised over the trailing three months, and the underlying data must be system-generated and independently verifiable.
Annex I illustrates the mechanics with a worked example: for a month in which a bank raises ₹900 in fresh deposits (interest cost ₹3) and ₹100 in fresh borrowings (interest cost ₹0.4), the cost of deposits works out to 0.33% and cost of borrowings to 0.4%; weighting these by their share of total fresh funds and annualising produces a monthly annualised weighted average cost of funds of 4.04%. The final MCLR-relevant figure — the marginal cost of funds — is then the simple average of that figure and the equivalent figures for the two preceding months. REs required to compute MCLR must publish their internal benchmark on the first calendar day of every month, and that published figure governs all benchmark-linked loans sanctioned during that month.
When Is an External Benchmark Mandatory?
All floating rate personal loans, and all floating rate loans extended to MSMEs, by commercial banks must be linked to an external benchmark. Commercial banks may extend external-benchmark-linked loans to other borrower categories too, at their discretion.
This external-benchmarking mandate does not apply to RRBs, UCBs, RCBs, NBFCs, or AIFIs — they may choose, at their own discretion, whether to offer external-benchmark-linked floating rate loans to any category of borrower.
How Must the Spread Be Determined and Revised?
The draft requires every RE to set its spread methodology through its Board-approved policy, including the acceptable range of spread for each loan category. It sets out four illustrative spread components:
- Credit Risk Premium (CRP) — reflecting borrower and facility-specific credit risk, based on a credit scoring/rating methodology that factors in probability of default, expected loss, collateral, and other mitigants.
- Operating Cost — the RE's own cost of raising, originating, servicing, and administering the loan.
- Term Premium — reflecting the loan's tenor.
- Business Strategy Premium — competitive positioning, liquidity considerations, expected returns, and other commercial factors.
The draft leaves "loan category" for an RE to define in its own policy — by product (housing, vehicle, working capital), by borrower type (MSME, mid-corporate, large corporate), a mix of both, or another criterion such as fixed versus floating rate. This matters because the spread range an RE sets applies per category, not per individual loan.
Two rules govern how these components behave over time. First, every component other than CRP may be zero, but CRP itself can never be zero — every loan must carry a positive credit risk premium. Second, CRP may only be revised when the borrower's actual credit profile changes, following a full credit risk review — it isn't a lever for general repricing.
For floating rate loans, spread components other than CRP cannot be revised for at least three years — reckoned from first disbursement, or the last revision, whichever is later. The one carve-out: an RE may reduce these components earlier, for customer retention, on justifiable and non-discriminatory grounds. This three-year lock does not apply to RCBs with deposits up to ₹1000 crore, NBFCs in the Base Layer, or UCBs in Tier 1 & 2.
What About Special Lending Situations?
Chapter IV addresses several scenarios that don't fit the standard new-loan pricing template:
Working Capital Demand Loans
Each fixed-tenor drawdown under a working capital facility may be treated as a separate loan for the purpose of determining its interest rate and spread, in line with the RE's policy.
Transfer of Loan Exposures
Where a loan is transferred but the lender-on-record for the borrower doesn't change, the original contractual interest rate terms — benchmark, spread, and reset mechanism — continue unchanged. Where a new agreement is entered into because the lender-on-record does change, the transferee's own interest rate framework takes over.
Co-Lending Arrangements
REs in co-lending arrangements must comply with these Directions in addition to — not instead of — the RBI Directions governing transfer and distribution of credit risk.
Foreign Currency Loans
Interest rates on foreign currency loans and advances must be set per the RE's policy, referenced to a market-determined external benchmark plus a risk-based spread.
Acquisitions, Mergers and Amalgamations
Where an RE acquires, merges with, or amalgamates loans from another RE, it must undertake a one-time mapping of the transferred loans to determine the applicable rate, benchmark and spread under its own policy — but that mapping cannot leave any borrower worse off than the rate they were paying immediately before the transaction.
How Would Existing Loans Transition to the New Framework?
Draft released for public consultation.
Deadline for public comments; final, RE-specific Directions to follow.
Proposed commencement date of the Directions, as drafted.
Deadline for migrating all existing benchmark-linked loans to the new framework.
All existing loans and advances linked to any internal or external benchmark would need to migrate to this new framework by April 1, 2029, through a one-time mapping exercise. That mapping requires the borrower's consent, cannot leave the borrower worse off in rate terms than immediately before migration, and cannot carry any migration charge. Separately, if a benchmark is discontinued mid-loan, the RE must switch the borrower to a replacement benchmark without disadvantaging them — and may build a fallback mechanism into the loan agreement in advance to handle exactly this scenario.
Current Framework vs the Proposed Draft
How to Respond / What to Watch For
Where to submit comments: Through the 'Connect 2 Regulate' section on the RBI website, or by email with the subject line 'Feedback on (full name of the draft Amendment Directions)'.
Deadline: September 11, 2026.
What's most likely to change before finalisation: RBI has explicitly flagged that this combined draft is a consultation exercise — the final Directions will be issued separately for each RE category. Expect the proportionality carve-outs (Base Layer NBFCs, Tier 1 & 2 UCBs, smaller RCBs) and the specific thresholds (₹1000 crore deposit line, ₹50,000 small value loan cap, 3-month/3-year timeframes) to be the areas most likely to see refinement based on industry feedback.
What to start preparing for: REs — especially NBFCs, AIFIs, and co-operative banks not currently subject to detailed benchmark/spread rules — should begin assessing what a Board-approved interest rate policy meeting these requirements would look like, review fixed rate loan pricing practices against the proposed benchmark-plus-spread rule, and evaluate systems readiness for MCLR-style marginal cost of funds computation if they may be pulled into that requirement.
Which Loans Would Be Exempted?
Chapter V carves out several categories of lending from the entire framework:
- Loans and advances under Government of India or Government Undertaking schemes (including refinance schemes) where interest rates are dictated by the scheme itself.
- Loans and advances sanctioned as part of a resolution plan.
- Lending in the Term Money market.
- Advances against a borrower's own Rupee or FCNR(B) term deposits — including advances to a partnership firm against a partner's deposit, to a proprietary concern against the proprietor's deposit, and to a ward's guardian borrowing on the ward's behalf.
- Advances to an RE's own employees, including retired employees.
- Advances to an RE's Chief Executive Officer or Whole-Time Director(s).
What Happens to the Existing Directions?
Chapter VI is the repeal chapter. On issuance, the draft would repeal six existing RE-specific 2025 Directions on interest rates on advances, listed in Annex II:
- RBI (Commercial Banks – Interest Rates on Advances) Directions, 2025
- RBI (Small Finance Banks – Interest Rates on Advances) Directions, 2025
- RBI (Local Area Banks – Interest Rates on Advances) Directions, 2025
- RBI (Urban Co-operative Banks – Interest Rates on Advances) Directions, 2025
- RBI (Rural Co-operative Banks – Interest Rates on Advances) Directions, 2025
- Paragraphs 60 and 61 of RBI (Non-Banking Financial Companies – Credit Facilities) Directions, 2025
The repeal comes with a standard savings clause: any rights, liabilities, penalties, investigations, or legal proceedings that arose under the repealed Directions continue to be governed by those Directions notwithstanding the repeal — nothing already in motion gets wiped out. The draft also clarifies it operates in addition to, not in place of, any other applicable law, and that RBI retains final and binding authority to interpret the Directions once issued.
Frequently Asked Questions
What is the RBI draft Interest Rates on Loans and Advances Directions, 2026?
It is a draft regulatory framework released by RBI on August 12, 2026 that proposes to harmonise interest-rate rules — for both fixed and floating rate loans — across Commercial Banks, RRBs, UCBs, RCBs, AIFIs and NBFCs, replacing six separate existing RE-specific circulars.
Who does this draft apply to?
As drafted, it applies to Commercial Banks (including Small Finance Banks and Local Area Banks), Regional Rural Banks, Urban and Rural Co-operative Banks, All-India Financial Institutions (EXIM Bank, NABARD, NaBFID, NHB, SIDBI), and Non-Banking Financial Companies including Housing Finance Companies, for their domestic operations only.
When does this circular take effect?
It has not taken effect yet — it is a draft open for public comments until September 11, 2026. As currently worded, the draft proposes a commencement date of April 1, 2027 if finalised without change.
How can stakeholders submit comments?
Comments can be submitted through the 'Connect 2 Regulate' section on the RBI website, or by email with the subject line 'Feedback on (full name of the draft Amendment Directions)', by September 11, 2026.
How is this different from the current rules?
Today, detailed benchmark and spread rules mainly apply to Commercial Banks and cover floating rate loans; other REs largely face conduct-related instructions, and fixed rate loans have very limited regulatory guidance. The draft extends detailed, principles-based rules for both fixed and floating rate loans to all REs.
What happens to existing loans if this is finalised?
Existing loans linked to any internal or external benchmark would need to be migrated to the new framework by April 1, 2029 through a one-time mapping exercise, carried out with borrower consent and without increasing the interest rate the borrower was paying immediately before migration.
What should REs do now, while this is still a draft?
REs and industry bodies can review the draft against their current loan pricing policies, systems, and MCLR computation processes, identify practical implementation gaps — particularly around fixed rate loan pricing and APR capping for small value loans — and submit comments before September 11, 2026.
CorpLawUpdates Analysis
The single most significant thing about this draft is not any one provision — it's the architectural choice to unify. RBI has spent years building interest-rate regulation bank-first, then retrofitting adjacent rules onto NBFCs, AIFIs, and co-operative banks. This draft flips that sequence: one principles-based framework, with proportionality built in through tiering and deposit-size carve-outs, rather than entirely separate rulebooks per RE type. If finalised broadly as drafted, this is likely to become the template RBI reaches for again in other cross-RE harmonisation exercises.
The most consequential practical change is the extension of real structure to fixed rate loan pricing. Institutions that have priced fixed rate loans more informally — without a codified benchmark-plus-spread methodology — will need to build that discipline into their policy and pricing systems well before April 2027. Equally, NBFCs and AIFIs that have never had to compute anything resembling MCLR will need to decide, ahead of finalisation, whether they intend to adopt an internal-benchmark methodology or lean entirely on external benchmarks instead — the draft leaves that as their choice, but it's a choice worth making deliberately rather than by default.
The compliance challenge most likely to bite in practice is the interaction between the three-month reset-periodicity cap, the three-year non-CRP spread lock, and the various proportionality carve-outs. Larger UCBs, RCBs above the ₹1000 crore deposit line, and larger NBFCs will need to track these thresholds carefully — a co-operative bank that grows past the deposit threshold, for instance, could find itself newly subject to obligations it wasn't previously required to meet, with no obvious grandfathering provision in the draft as it stands.
Looking ahead, the most important structural signal in this draft is RBI's own statement that final Directions will be issued separately, per RE category, after this consultation closes. That means the version of this framework that eventually binds a commercial bank could differ meaningfully from the version that eventually binds an NBFC or a UCB — even though both start from this same combined draft. Practitioners should treat this document as the base template, not the final word, and watch closely for how RBI recalibrates the proportionality carve-outs once the comment window closes on September 11.
Source Documents: Draft "Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026," and accompanying RBI Press Release
Reference: RBI/2026-27/<> | DOR.CRE.REC.<>/13.03.000/2026-27 (draft) | Press Release 2026-2027/877, dated August 12, 2026
Issuing Authority: Reserve Bank of India
Signatories: Dr. Sudarsana Sahoo, Chief General Manager (draft Directions); Brij Raj, Chief General Manager (press release)
This article is for informational and educational purposes only and does not constitute legal or regulatory advice. Verify with primary regulatory sources before acting.
