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* RBI came out with draft guidelines on harmonization of interest rates on loans and advances, effective 1st Apr’27. These regulations intend to speed up rate transmission on floating rate loans and transparency across the system.

* All floating rate loans to get reset within max three months ensuring quicker transmission of policy rates thus bringing in standardization across the lenders.

* MCLR to be calculated using a 3-month moving average of weighted cost of fresh deposits and fresh borrowings. This shall make deposit-cost movements flow through to lending rates faster unlike the current practice where majority of MCLR linked loans gets repriced in 6/12months. PSBs having 30-50% of their loan book linked to MCLR shall thus witness a quicker transmission on such loans.

* Non-credit risk spread components cannot be revised for three years on floating rate loans while the Credit Risk Premium can be revised only when the borrower profile undergoes a change. This shall lead to more transparent pricing for the borrowers.

* All existing floating rate loans to be migrated to the revised framework by 1st Apr’29 with borrower consent while ensuring that there is no increase in rates or migration fee charged to the borrowers.

* These guidelines will improve transparency in loan pricing and ensure quicker rate transmission across lenders. The guidelines mandate faster repricing on MCLR linked loans which may cause worries on PSU banks as they have benefitted from lagged repricing in a falling rate cycle. But with rate cycle nearing bottomed, guidelines being implementable from next fiscal and the possibility of rate hikes over next 6-12 months we believe banks may end up benefitting first as and when the cycle turns. In the long run these regulations shall narrow the difference in margin performance across Private Banks and PSBs though MCLR repricing will still depend on the extent of reduction in deposits / borrowing cost which has still declined lesser than the fall in repo rates in the current cycle

Harmonization of regulations; quicker transmission on MCLR

RBI’s new draft guidelines on interest rate on advances shall lead to greater harmonization of interest rates across regulated entities and ensure quicker transmission for MCLR-linked loans. All floating rate loans to get reset within max three months, and MCLR to to be calculated using a 3-month moving average of weighted cost of fresh deposits and fresh borrowings. This shall make deposit-cost movements flow through to lending rates faster unlike the current practice where majority of MCLR linked loans gets repriced in 6/12months. PSBs having 30-50% of their loan book linked to MCLR shall thus witness a quicker transmission on such loans.

PSB and Private banks repo transmission to move closer

In previous repo cycles, PSBs witnessed a lagged impact on repo transmission, as MCLR repricing was lower compared to that of private banks. However, with the new regulations mandating quicker MCLR resets and faster deposit pricing impact on lending rates, the lag in pricing between PSBs and private banks should narrow, despite PSBs having a higher MCLR book. In the long run these regulations shall narrow the difference in NIM performance across Private Banks and PSBs though MCLR repricing will still depend on the extent of reduction in deposits / borrowing.

Greater borrower protection and transparency

New regulations should ensure greater transparency in interest rates for borrowers. The explicit APR ceiling for MFIs and STPL loans of ≤INR50k, along with the requirement that total interest + charges does not exceed the principal for ST Agri loans to small/marginal farmers, should provide greater protection against arbitrary pricing. New regulations on the merger of REs require one-time mapping of borrowers, with the revised rate not exceeding the pre-merger rate. All these regulations are expected to ensure greater protection for borrowers

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