The Reserve Bank of India has released the draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 for public comment. If notified as proposed, the Directions will apply from April 1, 2027, and will replace, among other things, the interest rate provisions presently sitting in the RBI (Non-Banking Financial Companies – Credit Facilities) Directions, 2025 — the rules NBFCs follow today — folding them, along with the separate rate circulars that govern banks and co-operative banks, into a single framework applicable to every Regulated Entity (RE), including NBFCs and Housing Finance Companies, in respect of their domestic operations. For NBFCs, the changes go well beyond where the rules are housed — the draft alters how a benchmark rate is chosen, how often it can be reset, how the spread over that benchmark is built up, and how existing loans will eventually have to be migrated onto the new framework.
Why These Directions Now
Interest rate norms for NBFCs and other lenders have historically developed on separate tracks, so two broadly similar loans could end up governed by different rules depending on who extended them. Lending itself has also grown more varied in the meantime, with digital loans, co-lending arrangements and microfinance all expanding — all areas where NBFCs are active. The draft brings NBFCs’ interest rate rules into the same document as everyone else’s, on the reasoning that clearer, more consistent rules should help pass on rate changes to borrowers faster, while still preserving flexibility for smaller, less complex NBFCs through the Base Layer carve-outs discussed below.
Key Changes for NBFCs
1. A Board-Approved Policy on Loan Pricing
Every NBFC will need a comprehensive, Board-approved policy that sets out how it prices loans — the benchmark methodology it follows, the components that make up its spread, and how loan categories are defined, whether by product (e.g., vehicle loans, working capital loans), by borrower type (e.g., MSME loans, large corporate loans), or a combination of both. The policy also needs to record who within the organisation is authorised to set pricing, and it must be reviewed at least once a year.
2. How Interest Is Calculated
Interest is to be charged at monthly rests — annually for long-duration crop loans, and by reference to repayment due dates for short-duration crop loans — computed on the daily reducing balance and using the Actual/Actual day-count convention. For agricultural advances, compounding can only begin once a repayment falls overdue, not before. Repayment due dates can still be fixed independently of the date on which interest is applied to the account, in line with the NBFC’s own policy and the terms agreed with the borrower. Where a loan carries a fixed rate for part of its tenor and floats for the rest — a structure some NBFCs use for hybrid products — the fixed-rate and floating-rate provisions apply separately to each period. Most NBFCs already compute interest this way; those that don’t will need to adjust their systems.
3. Choosing a Benchmark: NBFCs Keep the Choice
Every loan, fixed or floating, must be priced as a benchmark rate plus a spread, and the effective rate can never fall below the benchmark itself. Commercial banks are required to link floating-rate personal loans and MSME loans to an external, market-determined benchmark; NBFCs face no such requirement and can continue to price any category of borrower off either an internal or an external benchmark, at their discretion. Whichever is chosen, the loan agreement has to spell out the benchmark used, the reset periodicity, and the reset date — details that will need to be built into standard loan documentation.
4. If Using an Internal Benchmark, It Must Track the Cost of Funds
An NBFC that opts for an internal benchmark must anchor it to its actual marginal cost of funds — broadly, what it currently costs the entity to raise money. Banks and larger co-operative lenders are bound to a specific, prescribed methodology for this (essentially the MCLR approach) and must publish the resulting benchmark on the first of every month for it to apply to that month’s sanctions. NBFCs are not tied to this particular formula; they may design their own methodology, provided it is Board-approved and made publicly available — on the NBFC’s website or app, or at its branches where no digital interface exists.
5. How Often the Rate Can Reset
On floating rate loans, the benchmark has to be reset at a periodicity the NBFC selects, capped at three months, and that periodicity, once fixed for a given loan, stays fixed for its entire tenor. Where the chosen periodicity is shorter than a month, the reset falls on the date set out in the loan agreement; otherwise, it falls on the first calendar day of the month in which the reset is due. NBFCs in the Base Layer are exempt from the three-month cap altogether, giving smaller NBFCs more room to manage asset-liability mismatches without being forced into rapid repricing cycles. Agricultural loans follow a different rule again: reset periodicity must track the crop season, subject to an outer limit of 12 months, irrespective of the general three-month cap — relevant for NBFCs with agri or allied lending books.
6. What Makes Up the Spread, and When It Can Change
The spread sits on top of the benchmark and typically comprises a credit risk premium, an operating cost component, a term premium, and a business strategy margin. It does not include separate charges or fees — those are dealt with through the APR requirement described in point 7 below. The credit risk premium can never be set at zero, and can only be revised when the borrower’s credit profile genuinely changes, following a documented review — not simply at the NBFC’s discretion. The remaining components are locked in for three years from disbursement (or from the date of the last revision, if later), except where an NBFC chooses to reduce them to retain a customer, done fairly and on a non-discriminatory basis. This three-year lock-in is optional for NBFCs in the Base Layer.
7. A Cap on Rates for Microfinance and Small Loans
For microfinance loans, and for personal loans up to ₹50,000, NBFCs must fix a clear ceiling on the all-in annual cost to the borrower — the APR, inclusive of interest and all other charges — and ensure it isn’t usurious. Separately, for short-term loans of up to a year extended to small and marginal farmers, total interest and charges together cannot exceed the principal amount.
8. Working Capital Demand Loans
Where a Working Capital Demand Loan is drawn down in tranches, each with its own fixed tenor, the draft allows each drawdown to be treated as a distinct loan for pricing purposes — meaning the interest rate and spread can be set independently for each tranche, in line with the NBFC’s policy, rather than fixed once for the entire facility.
9. Loan Transfers, Co-lending, Mergers and Foreign Currency Loans
Where a loan exposure is transferred but the lender of record doesn’t change, the pricing terms — benchmark, spread and reset mechanism — carry over unchanged under the original contract; where a new loan agreement is signed with the transferee, that entity’s own pricing framework takes over instead. Co-lending arrangements are additionally subject to RBI’s separate rules on transfer and distribution of credit risk. On a merger, acquisition or amalgamation, the surviving NBFC has to remap acquired loans onto its own pricing framework through a one-time exercise, but the remapped rate cannot exceed what the borrower was paying immediately before the transaction. Foreign currency loans continue to be priced off a market-determined external benchmark plus a spread, as before.
10. Moving Existing Loans to the New Rules by 2029
Every existing loan, whatever benchmark it currently references, has to be migrated onto the new framework by April 1, 2029, through a one-time mapping exercise. That migration needs the borrower’s consent, cannot leave them paying more than before, and cannot come with any charge attached. NBFCs carrying large floating-rate books would do well to start this planning early. Separately, if a benchmark an NBFC relies on is discontinued mid-tenor, it must switch to a replacement without disadvantaging the borrower — and can build a fallback mechanism into the loan agreement upfront to deal with exactly this scenario.
What NBFCs Should Do Now
- Track the draft against the RBI (NBFC – Credit Facilities) Directions, 2025 — once finalised, this draft will repeal the interest-rate provisions currently sitting there, so pricing policies should be benchmarked against the new document rather than the old one;
- Update the Board-approved interest rate policy to reflect the new rules on benchmarks, reset periodicity and spreads, and clearly define how loan categories are set (by product, borrower type, or both);
- Decide whether to use an internal benchmark, an external one, or both, and document the methodology if using an internal benchmark;
- Confirm whether the NBFC qualifies as a Base Layer entity, and map out the flexibility that status allows on rate-reset periodicity and spread-revision timelines;
- Review any hybrid fixed-to-floating loan products to ensure each period is priced under the correct (fixed or floating) rules;
- Set a clear cap on the total cost (APR) for microfinance loans and small loans up to ₹50,000;
- Update loan agreements and systems to clearly state the benchmark, reset periodicity and reset date — including for Working Capital Demand Loan drawdowns priced as separate loans;
- Update loan systems to calculate interest at monthly rests (or by crop season for agricultural advances), on the daily reducing balance, using the Actual/Actual method;
- Publish the internal benchmark methodology used, and the benchmark rate itself if the NBFC follows the prescribed MCLR-style approach;
- Set up a clear, documented process for when and how the credit risk premium can be revised, tied to actual changes in a borrower’s risk profile;
- List out loan categories that fall outside these rules — Government schemes, deposit-backed loans, employee loans, resolution-plan loans, term money market lending — so they aren’t accidentally brought within the new framework; and
- Start planning how existing loans will be moved to the new rules ahead of the April 2029 deadline, including a fallback plan for the possibility that a referenced benchmark is discontinued mid-tenor.
Conclusion
The draft reflects RBI’s broader push toward a single, principle-based framework for loan pricing across the regulated financial sector, while still leaving NBFCs meaningful room to make their own choices — particularly on which benchmark to use, on reset periodicity for Base Layer entities, and on how quickly their spreads need to change. That flexibility comes with clearer expectations around Board oversight, disclosure and fair pricing for vulnerable borrowers. NBFCs would do well to compare the draft against how they price loans today, respond to RBI during the comment window on any provisions that don’t sit well with their business model, and start factoring the 2029 transition into their technology and policy roadmaps well ahead of time.
