New Delhi: The Reserve Bank of India has proposed a new framework that could change how interest rates are determined and revised on floating-rate loans, potentially affecting the way home-loan EMIs respond to changes in interest rates. The proposed Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 are still in draft form. If finalised in their current form, the rules are proposed to come into effect from April 1, 2027.
Floating-Rate Loans Could Reset Every Three Months
One of the key proposed changes is the frequency at which interest rates on floating-rate loans are reset. Under the draft framework, the reset frequency for most floating-rate loans would not exceed three months. At present, some floating-rate loans may take longer to reflect changes in benchmark rates. A shorter reset cycle could mean that borrowers benefit more quickly when interest rates decline. However, the impact of rate increases could also reach borrowers sooner, potentially raising EMIs or extending the repayment period.
The loan agreement would have to clearly specify the benchmark linked to the loan, the frequency of rate resets and the applicable reset date.
What It Means For Home Loan Borrowers
The proposed changes are particularly relevant to borrowers with floating-rate home loans. If benchmark rates fall, the benefit could be passed on to borrowers faster. Conversely, an increase in the benchmark could also affect borrowing costs more quickly.
For a new home loan, borrowers would need to look beyond the advertised interest rate and examine the benchmark and the spread charged by the lender. The spread is the additional component added to the benchmark to arrive at the final lending rate.
For instance, a ₹50 lakh floating-rate home loan at 8% for 20 years would have an EMI of roughly ₹41,800. Even a 0.5 percentage-point difference in the interest rate could translate into an additional ₹3.5 lakh to ₹4 lakh in interest over the full loan tenure.
Existing Home Loans To Migrate By 2029
Existing loans linked to internal or external benchmarks would be moved to the proposed framework through a one-time migration exercise by April 1, 2029.
Borrowers would have to provide consent for the migration. The revised interest rate also cannot be higher than the rate applicable immediately before the loan is moved to the new framework. Lenders would not be allowed to charge a fee for this migration.
Borrowers therefore do not need to take any immediate action, as the proposed framework has not yet come into force.
Personal Loan EMIs May Not Change Suddenly
The proposed reset provisions primarily concern floating-rate loans. Most personal and auto loans in the retail segment are fixed-rate loans, meaning existing personal-loan EMIs would not automatically change because of these proposed rules.
However, borrowers taking new floating-rate personal loans could see greater transparency. The loan agreement would have to specify the benchmark, reset frequency and reset date.
The draft also proposes that all floating-rate personal loans offered by commercial banks would be linked to an external benchmark. These could include the RBI’s repo rate, Government of India Treasury Bill yields, the Secured Overnight Rupee Rate or another recognised interest-rate benchmark.
Lenders May Face Tighter Rules On Spreads
The proposed framework also seeks to restrict how lenders can change the spread charged over a benchmark.
The credit-risk component of the spread could be revised only if the borrower’s credit profile changes and the lender conducts a detailed review of the associated credit risk.
Other components, including operating costs, term premium and business strategy premium, generally could not be changed before three years for a floating-rate loan. Lenders could reduce these components earlier for customer retention, provided the reduction is based on justifiable and non-discriminatory grounds.
This would limit lenders’ ability to frequently alter parts of a loan’s pricing even when the underlying benchmark remains unchanged.
Protection If A Benchmark Is Discontinued
The draft framework also addresses situations where a benchmark linked to a loan is discontinued.
In such cases, lenders would have to replace the benchmark without putting borrowers at a disadvantage. Loan agreements could also specify a fallback benchmark to be used if the original benchmark is no longer available.
What Borrowers Should Check
For anyone planning to take a new floating-rate loan, the proposed changes make three factors particularly important: the spread charged over the benchmark, the frequency of interest-rate resets and the borrower’s ability to accommodate a possible increase in EMI.
The proposed framework is still under consultation and is not yet applicable. The RBI has invited comments on the draft until September 11, 2026. The provisions could therefore change before the final rules are notified.