On August 12, 2026, the RBI put out the draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 for comment, proposing to fold the interest-rate rulebooks of banks, co-operative banks, AIFIs and NBFCs (including HFCs) into one document, effective April 1, 2027, and apply to domestic operations of NBFCs, including Housing Finance Companies. At face value, the draft looks like a consolidation exercise. With this regulation, RBI endeavours to bring uniformity while fixing the interest rate based upon the category of loan and type of borrower, not only in terms of determining the interest rate but also from the point of view of disclosure. In this piece of note, we will talk about the proposed changes from NBFCs point of view.
A shift from principle to prescription
As of now, there is no provision under the extant RBI framework in regulating the interest rate, however NBFCs operate under a “disclosure-based” regime such as adopt a Board-approved interest rate model, disclose the gradation of risk, don’t be usurious but the actual mechanics of pricing (how often to reset, how long a spread must hold, what counts as a benchmark) were left to each NBFC’s own policy. In MFI sector, the microfinance interest-rate cap was removed with effect from March 2022, replaced by a board-governed, disclosure-based regime as applicable to other category of NBFCs.
Accordingly, the Draft Directions specifies that a NBFC shall have a comprehensive policy on interest rates on loans and advances, approved by the Board of Directors or a committee of the Board. The policy must cover the methodology for determining interest rates, internal benchmark, spread components, loan categories and delegation of pricing powers, and must be reviewed at least annually.
This is the real story for NBFCs: a move from “have a policy and disclose it” to “have a policy that conforms to RBI-specified pricing mechanics.”
1. The layer divide: relief for small NBFCs, new discipline for large ones
The draft is not uniform in its bite. Base Layer NBFCs are carved out of the two most consequential constraints the three-month reset ceiling (para 12) and the three-year spread lock-in (para 24) while Middle, Upper and Top Layer NBFCs, and by extension most HFCs of any scale, are not.
This bifurcation is worth reading strategically rather than just procedurally: it signals that RBI is comfortable leaving small, largely retail-funded NBFCs to price flexibly, but views larger, systemically relevant NBFCs as needing bank-like pricing discipline even though it has stopped short of forcing them onto MCLR or external benchmarks. In effect, scale in the NBFC sector now carries a second layer of regulatory cost beyond capital and governance -it extends into how nimbly an NBFC can reprice its book.
2. Interest rate framework
The NBFCs/HFCs must adopt a formal interest rate framework covering both fixed and floating rate loans, including hybrid structures where rates switch from fixed to floating mid-tenor. For both fixed- and floating-rate loans, the interest rate is to be determined with reference to an internal or external benchmark plus a risk-based spread, and the RE “shall not price a loan below the applicable benchmark”. Interest is to be charged at monthly rests (subject to specified agricultural-loan treatment), computed on a daily reducing-balance basis, with the Actual/Actual day-count convention. Whereas in case of Micro and Small value Loans, NBFCs have to put a ceiling on Annual Percentage Rate (‘APR’) which shall cover annual cost to the borrower including interest cost and all other charges associated with the credit facility. This guardrail is important from borrowers’ point of view to contain the penal charges or prepayment charges particularly, but the same will somehow impact the earnings of NBFCs/ Fintech companies since these are unsecured lending which have a high risk of default, so limiting the APR on such borrowers may move NBFCs away from this space.
3. Reset of Benchmark of Fixed and Floating Rate Loans
In case of Floating Rate Loans and Fixed Rate Loans, all the terms and conditions shall be guided by the loan agreement. In case of Floating Rate Loans, the benchmark (external or internal) used for pricing of the loan, reset periodicity and date of reset of the benchmark shall also be specified in the loan agreement. Under the draft harmonised framework, every floating-rate loan must specify its benchmark and reset dates upfront in the loan agreement, and the interest rate must be reset at pre-announced intervals that do not exceed three months so that a change in the underlying benchmark is passed on to the borrower within one quarter at most. At each reset the rate is re-aligned to the benchmark value prevailing on the reset date.
The provisions related to three months’ reset period do not apply to base layer NBFCs whereas other disclosures related to benchmarking and interest rate shall continue to apply to such NBFCs.
4. Benchmarking of Loans
At the outset, we must know the difference between internal and external benchmarking rate. An internal benchmark is a rate the lender computes from its own books, which was historically the BPLR and Base Rate, and since 2016 the MCLR (Marginal Cost of Funds-based Lending Rate), which is assembled from the marginal cost of funds, the negative carry on CRR, operating cost and a tenor premium. An external benchmark instead anchors the loan to a rate outside the lender’s control such as the RBI repo rate, the 91-day or 182-day Treasury Bill yield, or an FBIL-published rate. This makes pricing transparent (the benchmark is public) and transmission fast and near-automatic when the repo moves, the loan rate follows within a quarter.
Under the draft guidelines, the RBI has made external benchmarking mandatory for banks on new floating-rate loans to retail and MSME borrowers. For NBFCs (including NBFC-MFIs), external benchmarking is not mandatory. NBFCs are not required to migrate to EBLR and typically price off an internal, board-approved interest-rate model which is built-up from cost of funds, operating cost, credit-risk premium (the documented “gradation of risk”) and margin. What binds an NBFC is not a prescribed benchmark but a conduct and governance framework under the Fair Practices Code / Master Directions the interest-rate model and the risk-gradation rationale which is required to be disclosed in the application form and sanction letter, and published on the NBFC’s website, with the all-in cost shown to the borrower through the Key Facts Statement.
5. Spread lock-in
The spread must comprise a Credit Risk Premium (CRP) and one or more other components. CRP must be positive and may be revised only when the borrower’s credit profile changes, following a comprehensive credit-risk review.
The three-year restriction on revising non-CRP spread components (operating cost, term premium, business strategy premium) is arguably the most commercially significant provision for larger NBFCs and HFCs, yet it appears almost as a technical footnote in the draft. NBFC pricing has historically been more dynamic than bank pricing precisely because spread components not just the benchmark have been a lever for competitive repricing, portfolio steering, and margin management through the cycle. Locking non-CRP spread for three years constrains that lever materially, especially in a rate-cutting or intensely competitive cycle and pushes more of the pricing burden onto CRP revisions, which themselves require a documented credit-profile change and review -not a discretionary trigger. NBFCs that have used spread flexibility as a retention or growth tool will need to rethink pricing strategy around benchmark movements and credit events rather than commercial discretion.
6. Reading the transition timeline as a signal, not just a courtesy
The extended migration runway commencement in April 2027, full book migration by April 1, 2029, through a one-time mapping exercise is unusually generous compared to the pace of other recent RBI consolidations (the NBFC Credit Facilities and Responsible Business Conduct Directions of 2025 took effect immediately on issuance). That gap suggests RBI recognises the operational load this framework places on loan management systems, particularly for NBFCs whose systems were not built around reset-periodicity tracking or spread-component audit trails at the level of granularity now being asked for. The migration requires borrower consent, must not disadvantage the borrower, and no migration charge may be levied.
7. RBI’s 18 August 2023 circular still alive
The abovesaid circular will still operate even after getting effective of this draft direction. This circular is the single most important conduct rule on floating-rate revision for EMI-based floating-rate personal loans (home, auto, personal, loans against property to individuals for non-business use) wherein lenders are required to disclose potential impact of a benchmark and at each time of rest of borrower must be communicate such rest with option to (i) increase the EMI, (ii) elongate the tenor, or (iii) a combination; and allow (iv) prepayment, in part or full, without penalty. Besides, borrowers must be given the option to switch to a fixed rate, as per the lender’s board-approved policy. Though this circular is more of customers’ protection while resetting the loan than defining the system of determining the cost of loan advances to the customers.
8. Bottom line
The draft does not push NBFCs toward bank-style benchmarking, and in that sense preserves the sector’s pricing autonomy. But it quietly converts what was a disclosure obligation into a set of binding pricing mechanics for any NBFC above the Base Layer or HFC, most consequentially through the three-year spread freeze, which curtails a tool larger NBFCs have relied on for competitive and retention pricing. The real analytical takeaway is less about compliance checklist items and more about a structural narrowing of pricing flexibility for scaled NBFCs, arriving through provisions that read as technical, but function as strategic constraints.
Link to the Draft Directions: https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=5143
