Summary: The Reserve Bank of India has proposed draft loan pricing reforms aimed at harmonising and standardising how banks, NBFCs and other lenders price loans. The draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 includes a single rulebook for benchmark-linked pricing, standardised day-count conventions and tighter rules on floating-rate resets. A key provision, Paragraph 6.6, requires every regulated lender to fix an explicit ceiling on the annual percentage rate, including interest and every bundled fee, for microfinance loans and personal loans up to ₹50,000, and demonstrate that the ceiling is “not usurious.” The RBI does not prescribe a numerical limit, instead requiring lenders to determine the ceiling themselves, obtain board approval and be prepared to defend it. The article compares this approach with the RBI’s 2021 decision to replace the 24 per cent microfinance lending ceiling with a formula linked to the lender’s cost of funds. The draft provides for comments until September 11, with the rules proposed to take effect from April 2027 and lenders given until 2029 to migrate existing loan books. The article highlights the specific focus on small and potentially vulnerable borrowers while noting that the broader lending market remains largely untouched. For lenders pricing small loans at high rates, the key issue will be whether their pricing withstands future RBI scrutiny of what constitutes “not usurious.”
For an institution not known for tipping its hand, the Reserve Bank of India left an unusually legible trail this month. On August 5, at the customary press conference following the Monetary Policy Committee’s rate decision, Governor Sanjay Malhotra announced that the central bank would “harmonise and standardise” the way banks, NBFCs and other lenders price loans. He was careful to add that this would not be “any major change” — in particular, non-bank lenders would not be forced onto the external benchmark regime that banks already follow. It sounded, in other words, like housekeeping.
Seven days later, on August 12, RBI put out the draft text: the Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026. Much of it is exactly the housekeeping that was promised — a single rulebook for benchmark-linked pricing, standardised day-count conventions, tighter rules on how often floating rates can reset. Useful, but hardly the stuff of headlines.
Paragraph 6.6 and the “Not Usurious” Standard
One clause, however, sits apart from the rest. Paragraph 6.6 requires every regulated lender to fix an explicit ceiling on the annual percentage rate — interest plus every fee bundled in — for microfinance loans and for personal loans up to ₹50,000, and to be able to show that ceiling is “not usurious.” No number is attached to that word. The RBI does not say what usurious means here. It simply requires lenders to decide for themselves, get their board to sign off, and be ready to defend the figure if asked.
That is a more consequential sentence than the Governor’s press conference let on, and it is worth asking what it tells us about where this is heading.
RBI’s Approach to Interest Rate Caps
The Reserve Bank has generally avoided hard interest rate caps. When it lifted the 24 per cent ceiling on microfinance lending in 2021, it replaced a fixed number with a formula tied to the lender’s own cost of funds — a deliberate move away from a bright line and towards supervisory judgment. Paragraph 6.6 reads like the same instinct at work again. Rather than legislate a figure that lenders could design around, or that would need revising every time funding costs moved, the RBI has chosen a standard — “not usurious” — that it can apply case by case, on its own terms, once the rule is in force.
Implementation Timeline
There is also a pattern in the timing. The comment period runs to September 11. The rule itself does not take effect until April 2027, and lenders get until 2029 to migrate their existing loan books across. That is not the timetable of a regulator trying to catch anyone off guard. It reads more like an invitation: sort this out yourselves, on a reasonable schedule, before the RBI has to step in and do it for you. The Governor’s own remarks to NBFC chief executives earlier this year, when he spoke of the need for “customer-centricity, ethical conduct and responsible lending,” point the same way — the expectation of restraint appears to have arrived well before the formal deadline that will eventually enforce it.
Focus on Small and Vulnerable Borrowers
None of this means a numerical cap is coming, and it would be overreaching to predict one with any confidence. What can be said with more certainty is narrower: the RBI has, for the first time in this cycle of reforms, drawn a line specifically around the smallest and most vulnerable borrowers, while leaving the rest of the lending market largely untouched. That distinction — between how prime borrowers are treated and how small-ticket, often first-time borrowers are treated — is the real story buried in this draft, and it is easy to miss if one reads only the Governor’s opening remarks.
Practical Implications for Lenders
For lenders currently pricing small loans well above what most would call reasonable, the practical question is not whether the letter of paragraph 6.6 applies to them today. It is whether, when the RBI does eventually test what “not usurious” means in practice, their own numbers will hold up to that scrutiny. Given how the RBI has built this rule — vague on the number, firm on the principle, patient on the timeline — that test seems less a matter of if than when.
