The Reserve Bank of India (RBI) has announced a new plan to simplify and standardise the rules for interest rates on loans. RBI Governor Shaktikanta Das shared this update during the latest monetary policy review. The goal is to make loan pricing clearer and ensure that changes in RBI policy rates reach customers faster. This move will affect all Regulated Entities (REs), which includes all types of banks and non-banking financial companies in India.

Currently, different banks use different methods to set their lending rates. Some use the Marginal Cost of Funds Based Lending Rate (MCLR), while others use the External Benchmark Lending Rate (EBLR). The RBI has noticed that market practices are not uniform. For example, banks use different methods for 'day count convention' (how they calculate interest for a specific number of days) and have different dates for resetting interest rates. The new proposal aims to harmonise these rules so every lender follows a similar standard.

The history of these changes goes back a few years. In 2016, the RBI introduced MCLR, but it did not pass on rate cuts to customers quickly enough. In 2017, an Internal Study Group (ISG) looked into the MCLR system and suggested moving to an external benchmark. By October 2019, the RBI made it mandatory for banks to link new floating-rate loans for homes, cars, and MSMEs to an external benchmark like the Repo Rate.

External benchmarks are rates not controlled by the bank itself. These include the RBI Repo Rate, the 3-month or 6-month Treasury Bill yield, or any benchmark published by the Financial Benchmarks India Private Ltd (FBIL). Under the current rules, banks must reset the interest rate for external benchmark loans at least once every three months. This ensures that if the RBI changes the Repo Rate, the customer's EMI or loan tenure changes relatively quickly.

For bank officers, this new proposal means there will be clearer guidelines on how to price advances (loans). It aims to remove 'divergent market practices,' which means stopping different banks from using confusingly different methods for the same type of loan. This will help in 'monetary policy transmission,' which is a fancy way of saying that when the RBI changes interest rates, the public should feel the effect immediately.

The RBI will soon release 'draft directions' or a rough version of these new rules. They will ask for feedback from the public and the banking community before making them final. Bankers should watch out for these specific guidelines on how to handle benchmark reset dates and day count calculations. These steps are part of a larger effort to boost consumer protection and make sure borrowers are not charged unfairly due to complex bank calculations.