MUMBAI: The Reserve Bank of India (RBI) has proposed harmonising interest rate frameworks across regulated entities, a move that is likely to standardise loan pricing and improve monetary transmission while reducing the pricing discretion currently available to non-banking finance companies (NBFCs), according to Business Today.
Existing structure and proposed change
Business Today reported that the move would mark a departure from the existing structure under which commercial banks operate through structured benchmark systems, while NBFCs retain greater flexibility through internal, board-approved prime lending rate models. Under the broad direction of policy, the central bank is likely to extend principle-based interest rate rules across lenders to curb arbitrary pricing and strengthen consumer protection.
Currently, under bank rules, retail and MSME floating rate loans are linked to an external benchmark rate such as the RBI repo rate or treasury bill yields, while other floating loans are tied to internal benchmarks such as the Marginal Cost of Lending Rate (MCLR). NBFCs, by contrast, use internal prime rates.
What the new norms would require of NBFCs
The framework is expected to push NBFCs towards standardised benchmarking of floating rate loans, and the new norms will impact all non-bank lenders, including housing finance companies and microfinance providers. According to Business Today, NBFCs could be required to:
- Adopt recognised external benchmarks for retail and MSME loans, or formal internal benchmarks instead of internal prime rates.
- Follow a uniform benchmark within each loan category to improve predictability for borrowers.
Standardised reset timelines
RBI is also likely to introduce standardised reset timelines for floating rate loans. At present, NBFC practices allow flexibility in resetting rates, which can result in slower transmission of rate cuts compared to hikes.
External benchmark-linked loans may require resets at least once every three months, while internal benchmark-linked loans could have a maximum reset period of one year.
Loan agreements are likely to be required to clearly specify reset dates to improve transparency.
At a glance: existing bank rules vs proposed harmonised norms
| Aspect | Existing bank rules | Proposed harmonised norms for NBFCs |
|---|---|---|
| Retail/MSME floating loans | External benchmark: RBI repo rate or T-bill yields | Recognised external benchmarks or formal internal benchmarks |
| Other floating loans | Internal benchmarks such as MCLR | Uniform benchmark within each loan category |
| NBFC pricing basis | Internal, board-approved prime lending rate | Replace internal prime rates with external/formal benchmarks |
| Reset timelines | Flexibility; slower transmission of rate cuts | External-linked: at least once every 3 months; internal-linked: max 1 year |
| Transparency | Not specified | Loan agreements to specify reset dates |
What this means for borrowers and monetary transmission
According to Business Today, standardising benchmarks and reset timelines is expected to improve monetary transmission, meaning rate cuts by the RBI could flow through to borrowers more quickly and symmetrically than at present, when NBFC flexibility can slow the pass-through of cuts relative to hikes. For corporate treasurers and CFOs borrowing from NBFCs, the move implies greater predictability in floating-rate loan resets, a shift from internal prime rates to recognised benchmarks, and clearer loan agreements specifying reset dates.
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