RBI Loan Pricing Rules: What Borrowers Should Know

As a way of streamlining the process of determining a harmonised framework for loan pricing, the Reserve Bank of India has proposed a harmonised approach to pricing of loans. For borrowers, the key point to note is that knowing the benchmark rate, spread, APR, and overall borrowing cost will become all the more critical while comparing loans. 

While taking any new loan, the borrowers must consider the cost of the loan as a whole and not merely its interest rate.

Quick Overview

This suggested framework will entail more stringent requirements relating to benchmark-linked lending rates, loan spreads and pricing policies. It also contains measures regarding pricing of some lower-value and microloans. These are still draft suggestions; therefore, customers should be able to separate the existing requirements from the future ones.

What Could Change for Borrowers?

Another important aspect is the issue of determining and modifying loan interest rates. The draft contains provisions for more stringent conditions on modifying the spread based on the benchmark, where the credit risk portion will be affected by changes in the credit worthiness of the borrower. Other portions of the spread shall have restrictions regarding the frequency of modification.

In case you are an existing borrower with a floating rate loan, this may put emphasis on understanding:

1. The Benchmark your loan follows

2. Frequency of resetting of the rate

3. Components of the lender's spread

4. Impact that modifications can make on your EMI/tenure

5. Annualized cost of the loan

The RBI has already mandated lenders to inform the borrower about the impact of benchmark changes on their EMI and/or loan tenure in respect of relevant floating rate personal loans.

PrimeScore can help borrowers stay financially prepared by monitoring their credit profile and understanding their broader credit health before taking on new borrowing commitments.

Our View: Borrowers Should Do More Than Compare Interest Rates

At PrimeScore, we feel that increased transparency in the pricing of loans will make the borrower a more discerning consumer. The lower advertised interest rate may not always translate into a lower-cost loan in terms of processing fees, insurance, repayment schedule, reset of benchmark and other costs associated with it.

It must be noted that the proposed framework is still under the purview of the regulatory process, and hence, the borrower should refrain from making a provision in the draft of the final rule. RBI is taking public feedback for the proposed framework, which is likely to come into effect from April 1, 2027.

The smartest approach is to compare the full borrowing cost, understand how your rate can change, and make sure the EMI remains affordable even if your financial circumstances become less favourable.