RBI’s Draft Interest Rates on Loans and Advances Directions, 2026

A Move Towards Greater Transparency in Lending

In August 2026, the Reserve Bank of India (RBI) released the draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026, proposing a comprehensive framework for the way regulated entities determine and apply interest rates on loans. While the Indian banking sector has long operated under a patchwork of institution-specific instructions, the draft Directions seek to bring much-needed consistency to interest rate regulation across banks, cooperative banks, regional rural banks (RRBs), all-India financial institutions and NBFCs. If finalised in their present form, the Directions will come into effect from 1 April 2027.

At their core, the proposed Directions are aimed at improving transparency, standardising pricing practices and strengthening borrower protection. The RBI has proposed that every regulated entity maintain a Board-approved policy governing loan pricing, including the methodology for determining benchmarks, spreads and risk premiums. This reflects the regulator’s growing emphasis on internal governance and accountability in lending decisions.

One of the more significant proposals relates to the way interest is calculated. The draft requires interest to be computed on a daily reducing balance basis using the Actual/Actual day-count convention. Interest would generally be charged at monthly rests, although special treatment has been retained for agricultural advances to reflect crop cycles and repayment patterns. Importantly, in the case of short-duration crop loans, interest may be aligned with harvest and repayment seasons, and compounding would occur only when an instalment becomes overdue.

The draft also contains several measures that are clearly intended to strengthen consumer protection. Notably, regulated entities would be required to explicitly put a ceiling on the Annual Percentage Rate (APR), inclusive of interest and other charges or fees, applicable to microfinance loans and small-value loans, with small-value loans being personal loans to individuals where the principal amount does not exceed ₹50,000. In addition, the total interest and all other charges or fees on short-term agricultural loans and advances to small and marginal farmers cannot exceed the principal amount borrowed. For this purpose, a short-term loan is one with an original tenor of up to one year. These provisions are likely to be particularly relevant for states such as Telangana and Andhra Pradesh, where agricultural lending and microfinance continue to play an important role in credit delivery and financial inclusion.

The RBI has also sought to bring greater predictability to floating-rate lending. Commercial banks will continue to be required to link specified floating-rate personal loans and MSME loans to external benchmarks. Borrowers must be informed of the benchmark used, the frequency of reset and the mechanism through which interest rates will change over the life of the loan. In a market where borrowers often struggle to understand pricing revisions, this proposal could substantially improve transparency.

Another noteworthy aspect of the draft is its treatment of loan spreads. While lenders retain flexibility to account for credit risk, operating costs and commercial considerations, the RBI has proposed guardrails against frequent repricing. Credit risk premiums may be revised when there is a change in the borrower’s credit profile, while other components of the spread generally cannot be revised for three years in floating-rate loans.

Taken together, the proposed Directions represent far more than a technical consolidation exercise. They signal the RBI’s intention to make loan pricing more transparent, predictable and borrower-friendly while preserving sufficient flexibility for lenders to manage risk. As the consultation process progresses, banks, NBFCs and cooperative institutions across India, including those operating in Telangana and Andhra Pradesh, will be closely watching the final form of these Directions and the operational changes they may necessitate.

Source: RBI Draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026, released on 12 August 2026.

Last Updated on 16 September, 2026