MUMBAI — The RBI loan pricing overhaul announced alongside this week’s monetary policy will standardise how banks and NBFCs calculate interest on loans from October 1, without changing what borrowers actually pay.
Governor Sanjay Malhotra set out the proposal at the post-policy press conference on August 5. The central bank will issue draft directions and invite comments before finalising the framework.
What is being harmonised
The target is not the level of interest rates. It is the machinery underneath them.
Two parallel systems currently operate. The Marginal Cost of Funds-Based Lending Rate, or MCLR, prices loans off a bank’s own cost of raising money. The External Benchmark Lending Rate, or EBLR, introduced in 2019, ties loans to something outside the bank’s control, usually the repo rate or a treasury bill yield.
Around 67.6 percent of bank loans now sit under EBLR, according to an SBI report. The remainder sit under MCLR or older frameworks, which means several pricing systems run at once inside the same banking sector, and sometimes inside the same bank.
The RBI wants to reduce the differences in market practice between them. Two specific items are named: day count conventions, which determine how many days of interest a lender charges in a given period, and benchmark reset dates, which determine when a rate change actually reaches a borrower’s EMI.
Why those two details matter
Day count conventions sound like accounting trivia. They are not. A lender using a 360-day year charges slightly more interest than one using 365 days for the same nominal rate on the same loan. The difference is small per month and meaningful over a 20-year home loan.
Reset dates matter more directly. When the RBI cuts the repo rate, an EBLR borrower’s rate does not fall that day. It falls at the next reset, which may be quarterly, and the choice of reset schedule is currently the lender’s. Two borrowers with identical loans at different banks can wait different lengths of time for the same policy cut to reach them.
Standardising both means a rate comparison between two lenders measures the same thing. At present it does not.
What it will not do
Malhotra was direct about the limits. He said the proposal would not bring major changes to the existing lending rate framework, and would not require NBFCs to shift to the EBLR regime.
That second point protects a large part of the non-bank sector. NBFCs lend to borrower segments where funding costs do not track the repo rate closely, and forcing them onto an external benchmark would have squeezed margins in ways the RBI evidently does not want.
Borrowers should not expect EMIs to move. Analysts have been clear that this is a transparency measure rather than a rate action.
Vijendra Singh Shekhawat, chief executive of Choice Finserv Private Limited, put the point in a single line. “The problem being solved is fragmentation, not the level of rates,” he said.
The transmission problem behind it
The real motivation is monetary policy transmission, the question of whether an RBI rate decision actually reaches the economy.
India’s record on this has been poor for decades. The base rate system was replaced by MCLR in 2016 because transmission was too slow. MCLR was supplemented by EBLR in 2019 for the same reason. The share of loans linked to external benchmarks rose from 2.4 percent in September 2019 to 28.5 percent by March 2021, and to roughly two-thirds now.
Each reform improved transmission and left the previous system running alongside. The result is the fragmentation the RBI is now addressing: a rate cut reaches different borrowers at different speeds depending on which historical framework their loan happens to sit in.
The central bank says the measures should ensure greater consistency in loan pricing, improve transmission of policy decisions and enhance consumer protection.
Malhotra framed the wider intent in terms of uniformity across the sector. “The proposal seeks to harmonise regulations governing interest rates on advances for all regulated entities,” he said, describing the aim as reducing differences in market practice rather than rewriting how lending works.
The policy meeting it arrived with
The pricing proposal came alongside a decision to do nothing on rates. The MPC, meeting on August 3, 4 and 5, held the repo rate at 5.25 percent by unanimous vote and kept its neutral stance. The Standing Deposit Facility stayed at 5 percent, the Marginal Standing Facility and bank rate at 5.5 percent. FY27 growth was revised up to 6.7 percent from 6.6.
Malhotra explained the hold as a wait for better information rather than a judgement on the economy. “There is a need for greater clarity to emerge, especially regarding inflation, its path and composition before taking any policy action,” he said.
Headline inflation has moved above the 4 percent target, but he attributed that to food and fuel rather than anything broader, noting “little signs of generalisation of price pressures so far”. The RBI expects inflation to peak in the October-December quarter before easing.
He listed the risks plainly. “Global oil prices have also remained highly volatile, with sharp two-way movements triggered by geopolitical developments, blurring the near-term inflation outlook,” he said, adding that El Niño’s effect on the distribution of rainfall remains a major risk and that second-round effects from higher food, fuel and input costs could still broaden.
Asked to characterise the stance at the press conference, Malhotra said the RBI was neither dovish nor hawkish and would be guided by headline inflation.
That backdrop matters for reading the pricing proposal. A central bank holding rates while renewed West Asian tensions push energy prices around has a sharper interest than usual in knowing that a future cut will actually reach borrowers. Fixing the plumbing is what you do when you cannot safely move the tap.
Who actually gains
The beneficiaries are not evenly distributed, and it is worth being specific about that.
Borrowers who shop around gain most, because comparability only helps someone who compares. Indian retail borrowers historically do not switch lenders often, partly because the paperwork is heavy and partly because the true cost difference has been hard to establish. Removing the second obstacle does not remove the first.
Borrowers on older MCLR loans gain least. The RBI is not forcing migration, so a customer sitting on an MCLR home loan taken years ago will keep waiting longer for rate cuts than an EBLR borrower next door. The existing rule allowing a switch to external benchmarks remains, and it remains something the borrower has to initiate.
NBFC customers see the least change of all, since the regulator has explicitly declined to move NBFCs onto external benchmarks.
The deposit side, already changed
This follows a parallel move on deposits. In July the RBI revised deposit interest rate regulations, also effective October 1.
Under those rules, banks can no longer offer different interest rates on similar deposits accepted on the same day simply because they were booked at different branches. Banks must publish deposit interest rate schedules, including bulk deposit rates, on their websites in advance, with bulk rates disclosed every business day by 10 am or 10:10 am at the latest.
Banks retain flexibility to offer differential rates on bulk deposits based on Liquidity Coverage Ratio considerations, which preserves their ability to price large corporate money according to how useful it is for regulatory purposes.
Taken together, the two sets of rules apply the same logic to both sides of a bank’s balance sheet: publish the price, apply it consistently, and let customers compare.
What it means for India
For a retail borrower, the practical effect is comparability. A home loan quote from one bank will become directly comparable to another, because both will calculate days the same way and reset on the same basis. That is a modest gain, and it is the kind that compounds across a market where most borrowers never switch lenders.
For banks, the cost is operational rather than financial. Systems built around bank-specific conventions will need reworking before October 1, and lenders running large MCLR books alongside EBLR books have the most to do.
The larger question is whether harmonisation finally fixes transmission or simply adds a fourth layer to a system that already has three. The RBI has chosen not to force migration, which keeps the sector stable and leaves the parallel frameworks in place. That is a deliberate trade-off, and it means the fragmentation problem is being narrowed rather than removed.
Draft directions are expected shortly, with stakeholder comments to follow before the framework is finalised.
