RBI's loan pricing revamp: Experts explain what could change for borrowers

Regulator is standardising how loans are priced. Here's what it could mean for EMIs, transparency and future rate cuts.

The Reserve Bank of India (RBI) has proposed to standardise the rules governing how banks and non-banking financial companies (NBFCs) price loans — a move that could make borrowing more transparent and easier to understand for customers.

 

The proposal, announced alongside the central bank's monetary policy decision on Wednesday, is not expected to reduce borrowers’ equated monthly instalments (EMIs) immediately. Instead, it aims to ensure that loan pricing follows a consistent framework across all regulated entities, making it easier for customers to compare loan offers and understand how changes in interest rates affect them.

 

Speaking after the policy announcement, RBI Governor Sanjay Malhotra said the proposal is essentially a standardisation exercise rather than a major overhaul of the lending rate framework.

 

“We have introduced these rules to standardise them. This will increase transparency. People will know how the interest rates are set. This is a rationalisation exercise which will increase consumer protection,” Malhotra said.

 

Why is the RBI changing the framework?

 

Over the years, banks have adopted different lending rate systems. Older loans are linked to the marginal cost of funds-based lending rate (MCLR), while many newer floating-rate loans are tied to external benchmarks such as the RBI's repo rate. NBFCs, meanwhile, generally use their own internal pricing models.

 

According to an SBI report, this has resulted in multiple lending frameworks operating simultaneously. While the RBI introduced external benchmark-linked lending rates (EBLR) in 2019 to improve monetary policy transmission, around 67.6 per cent of bank loans are currently linked to EBLR, with the rest continuing under older frameworks.

 

The central bank now wants to harmonise these parallel systems without forcing lenders to abandon their existing models. The proposal also seeks to standardise practices such as benchmark reset dates and day-count conventions used for calculating interest.

 

According to the RBI, the objective is to improve transparency in loan pricing, strengthen monetary policy transmission and enhance consumer protection.

 

Why does this matter for borrowers?

 

Experts say the proposal is less about lowering borrowing costs and more about making loan pricing easier to understand.

 

“The problem being solved is fragmentation, not the level of rates,” said Vijendra Singh Shekhawat, chief executive officer  of Choice Finserv Private Limited.

 

He noted that borrowers navigate different lending systems, with older loans linked to MCLR, newer ones linked to external benchmarks and NBFCs following their own pricing methods. This makes loans difficult to compare and causes RBI policy rate changes to reach borrowers at different speeds.

 

"The RBI has been clear it is not moving rates here. It is removing the inconsistencies that let two economically identical loans behave differently, and the consumer-protection value in that is real," Shekhawat said.

 

Kapil Makhija, chief operations officer at MinEMI, said borrowers often focus only on the headline interest rate while overlooking important clauses that determine how much they eventually pay.

 

"We speak to close to a hundred borrowers a day, and almost every one of them has decided on a single number, the rate they were quoted. Very few know that the day-count convention, the reset date or the spread revision clause will change what they actually pay," he said.

 

He added that two lenders can quote the same interest rate but still charge different amounts because they calculate interest differently or follow different reset schedules.

 

Will EMIs come down immediately?

 

They will not.

 

The RBI has left the repo rate unchanged at 5.25 per cent, and the proposed framework itself does not alter lending rates.

 

"No, and it would be wrong to oversell it," Shekhawat said. "This is a structural and transparency reform, not a rate action."

 

He said borrowers should instead expect more predictable transmission of future repo rate changes over time, particularly for loans with shorter reset cycles.

 

Makhija echoed this view, saying the benefit will come only after the proposal is finalised and implemented. "What improves is the predictability of future cuts, not the level of rates today," he said.

 

Kundan Shahi, founder of loan repayment platform Zavo, said borrowers should avoid expecting cheaper loans simply because of the proposal.

 

"The biggest benefit over the coming year is likely to be predictability rather than cheaper loans. Borrowers will have a clearer understanding of how rate changes affect them, and that's an important step towards building long-term trust," he said.

 

A simple example

 

Consider a Rs 50 lakh home loan for 20 years at an interest rate of 8.5 per cent. The EMI works out to around Rs 43,390.

 

According to Shekhawat, two lenders may currently quote the same interest rate but calculate interest differently by using different day-count conventions or reset schedules. That can affect how much borrowers pay over the life of the loan.

 

Similarly, Makhija explained that if the RBI cuts the repo rate by 25 basis points in future, the timing of the benefit depends on the loan's reset date. A borrower whose loan resets quarterly may receive the lower rate much sooner than someone whose loan resets annually. Standardised rules would make these timelines more transparent.

 

For personal loans too, Shahi said the biggest gain is clarity. For example, a borrower with a Rs 10 lakh loan for five years at 11 per cent could save around Rs 250 a month if a future 50-basis-point repo rate cut is passed on at the next scheduled reset. More importantly, the borrower would know exactly when and why the EMI changes.

 

What should borrowers check?

 

Experts say borrowers should look beyond the advertised interest rate once the final rules are notified.

 

Key aspects to examine include:

 

• The benchmark to which the loan is linked.
• The frequency and date of interest rate resets.
• The spread or margin charged over the benchmark.
• The day-count convention used to calculate interest.
• Prepayment, foreclosure and balance transfer charges.

 

Whether the lender changes the EMI or extends the loan tenure when interest rates move.

 

"The smartest borrowers don't just ask what the interest rate is. They ask how it's calculated, when it changes and what flexibility they have over the life of the loan," Shahi said.

 

While the proposal is unlikely to change borrowing costs overnight, it could make India's lending system easier to understand, compare and navigate, giving borrowers greater confidence about how their loans are priced and how future policy rate changes will affect them.