The Reserve Bank of Indian (RBI) has proposed a new framework on how banks and non-banks price their loans, aimed at improving transparency and protecting borrowers.
The central bank said it has proposed to issue harmonised Directions for all regulated entities (REs), prescribing a broad, principles-based framework for the determination of interest rates on both fixed rate and floating rate loans, commensurate with the nature, complexity, and scale of the operations of these entities.
Analysts believe the draft regulation are aimed at harmonising interest-rate regulations across regulated entities including banks and NBFCs into a transparent structure covering benchmark selection, spread determination, reset frequency, interest computation and customer disclosures.
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What are the new rules?
Under the new proposed framework, all loans (fixed, floating) have to be linked to benchmark plus a spread based on transparent Board approved internal policy. Loan cannot be priced below the benchmark rates.
According to brokerage firm Jefferies, many NBFCs price loans at a discount to PLR would need to reset their benchmark.
RBI has retained external benchmark linkage for floating-rate personal and MSME loans for banks, while proposing to standardize MCLR calculation based on a three-month average cost of fresh deposits and borrowings.
Fixed-tenor drawdown under WCDL facilities may be treated as separate loans for setting interest rates and spreads.
The central bank proposed standardized interest computation through daily reducing balance, Actual day-count convention and monthly rests.
Jefferies believes the implementation of Actual or Actual day convention may lead to some operational challenges.
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Citi said that the RBI's draft consolidated Interest Rates Directions aim towards greater transparency, borrower protection, rationalization, standardization and strengthening rate governance framework across all regulated entities.
According to the brokerage firm, key changes include:
- Spread Revision -Non-CRP spread components locked for 3 years; CRP revisable only on credit profile change
- APR Cap explicitly mandated for microfinance and small-value retail loans (less than or equal to Rs 50,000
- Day Count convention standardized to Actual/Actual (versus Actual/365 or Actual/360)
- Reset periodicity explicitly capped at 3 months for all floating-rate loans
- MCLR computation standardized: 3-month moving average of monthly marginal cost of fresh deposits and borrowings.
The brokerage believes APR ceiling will cap yields for lenders reliant on high-yield small-ticket lending. Additionally, complexity and near-term compliance costs will be non-trivial. However, transition deadline of April 29 provides adequate runway.
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