RBI draft lending norms may speed up rate transmission, limit flexibility

Brokerages expect the RBI's proposed lending rate framework to improve transparency and speed up transmission, while restrictions on spread changes could limit lenders' pricing flexibility

The Reserve Bank of India’s (RBI’s) proposed framework for interest rates on advances may speed up the transmission of rate changes and bring greater standardisation to loan pricing, though it could limit lenders’ flexibility in managing spreads, brokerages said. 

The draft directions, released on Wednesday for public comments, are mildly negative for middle- and upper-layer non-banking finance companies (NBFCs) and housing finance companies (HFCs) from a pricing-flexibility perspective, 360 ONE Capital said. However, the impact is significantly mitigated by allowing them to continue using internal benchmarks.

  Under the proposed framework, floating-rate benchmarks would have to be reset at intervals of no more than three months, while non-credit-risk components of the spread cannot be revised for three years. Changes in the credit-risk premium would be allowed only when a borrower’s credit profile changes following a review.

  “The retention of internal benchmark flexibility significantly mitigates the impact,” 360 ONE Capital said, adding that it sees no material financial impact on companies under its coverage. Base Layer NBFCs have also been exempted from the three-month reset and three-year spread restrictions.

  Motilal Oswal said the proposed changes would improve transparency and ensure faster transmission. Floating-rate loans would have to reset within three months, while the marginal cost of funds-based lending rate (MCLR) would be calculated using a three-month moving average of the weighted cost of fresh borrowings and deposits.

  The brokerage said banks could be the first beneficiaries if interest rates rise over the next six to 12 months, though public-sector lenders may face near-term pressure as they have benefited from lagged MCLR repricing.

  “In the long run the difference in net interest margin (NIM) performance across private and public-sector banks shall narrow,” Motilal Oswal said, noting that MCLR repricing would continue to depend on deposit and borrowing costs, which have declined less than the repo rate in the current cycle.

  Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, said the broad objective of the proposed rules was to encourage faster transmission by reducing reset periods, while standardising reset mechanisms and other procedural aspects.

  He highlighted the absence of a mandated benchmark for NBFCs as a key positive. “The good part is there is no forced benchmark for NBFCs

  in terms of repo rate linked loans or EBLR loans,” Ganapathy said. He, however, added that the requirement to keep spreads unchanged for three years would leave lenders with “limited flexibility in manoeuvring”.

  Floating-rate loans to MSMEs would have to be linked to an external benchmark such as the repo rate. Ganapathy said the proposed three-month moving average for the marginal cost of funds, along with benchmark resets at intervals of no more than three months, would make loan-rate transmission faster.

  The draft directions are proposed to take effect from April 1, 2027. Existing loans would have to migrate to the new framework by April 1, 2029, with borrower consent and without any increase in the interest rate or a migration fee.