RBI To Standardise Framework Governing Loan Rates

The Reserve Bank of India (RBI) on Wednesday proposed to harmonise and standardise the regulatory framework governing interest rates on loans across all regulated entities, including banks, housing finance companies and non-banking financial companies (NBFCs), with the objective of enhancing transparency and consistency in loan pricing.

Sanjay Malhotra, governor RBI said that the proposed measures seek to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection.

Currently, different categories of regulated entities follow different frameworks for pricing loans.

The RBI said that it proposes to rationalise the regulatory framework on interest rates for all Regulated Entities (REs) on a principle-based basis. The proposed rationalisation aims to harmonise the guidelines across REs while maintaining proportionality; address certain operational aspects of the current framework on marginal cost of funds based lending rates and external benchmark based lending rate and standardise certain divergent market practices concerning interest charging, including day count convention and benchmark reset dates.

Draft directions incorporating these proposals will be issued shortly for public comments.

Pricing of bank loans has a long history of evolution keeping in mind transparency and monetary policy transmission imperatives. Up till 2010 banks used the Prime Lending Rate, followed by the base rate. After 2016, the banks have migrated to marginal cost based lending rate (MCLR) that links the lending rates to marginal cost of funds. To further increase the transmission, in 2019 RBI permitted external benchmark based lending rate (EBLR). Currently, 67. 6 per cent of the bank loans are under the EBLR regime, according to SBI Economic Research report.

At the Monetary Policy press conference on Wednesday, on a question on the government’s proposal to allow Merchant Discount Rate (MDR) charges on certain UPI transactions, the RBI Governor Malhotra said it is “premature” to talk about the issue right now and advised to wait-and-watch.

He however said investment in public infrastructure like payments is necessary and someone will have to pay for it.

He said the choices before us are simple: either the general public has to pay for it through taxes, or we have to levy the merchant discount rate (MDR), following the 'user pays' model.

“Right now the government is getting us the amendment. Costs have to be paid by someone. We all want this public infrastructure to strengthen and become more efficient, etc. We continue to do that. That is our focus right now; let us wait and watch for further developments,” Malhotra said.

MDR is the commission that merchants pay to the banks and other payment companies for facilitating the transaction. There is no MDR on UPI payments, while debit cards have an average of 0. 75 percent and credit cards have around 1. 75 percent per transaction.

The important aspect is that someone has to pay for the service, the RBI Governor said.

“What is important is that we continue to invest and continue to find the means, whether it is MDR or others. Let us wait and see how the situation evolves,” he said.

RBI has also decided to resume licensing of urban co-operative banks (UCBs) on ‘on tap’ basis. UCBs have long been an essential part of India's cooperative story, providing banking services to segments - often underserved by larger banks - small traders, self-employed individuals, salaried workers, and others in the informal sector. As of March 2025, there are around 1457 UCBs in India, which hold around 2 per cent of the deposits.

“Licensing of new UCBs has been paused since 2004, so, this step will enhance financial inclusion but there is a need for stronger governance, professional management, timely oversight, and secure technology adoption for resilience,” said Soumya Kanti Ghosh group chief economic adviser State Bank of India.

RBI is also issuing directions after a comprehensive review of the credit monitoring arrangement for rural cooperative banks (RCB), considering experience gained and developments since the framework was last revised in 2008. The share of RCB in total assets of the co-operative sector has increased from 66. 9 per cent in March 2020 to 71. 2 per cent in March 2024.

However, given the narrow business base on the lending side, RCB continues to face the challenges of lending portfolio concentration (sector and geographic) compared to UCBs. The current measure addresses this aspect of the RCB structure.