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RBI eases spread reduction and fixed-rate switch rules for loans

No longer current — withdrawn, no replacement on file yet

Source: Reserve Bank of India · RBI/2025-26/83 · issued 29 Sep 2025 · ~2 min read

Quick answerRBI now allows banks to reduce spread components on loans before three years for customer retention, and makes fixed-rate switch optional for lenders on floating-rate personal loans. Effective October 1, 2025.

What changed

RBI inserted a proviso in the Interest Rate on Advances Directions, 2016 allowing banks to reduce other spread components for a loan category earlier than three years, provided it is for customer retention, on justifiable grounds, and non-discriminatory. Separately, the August 2023 circular on floating-rate personal loan EMI resets was amended to make the fixed-rate switch option at reset optional for regulated entities, not mandatory. Two FAQs (No. 4 and 5) were deleted, and FAQ 3(b) was updated to reflect that the fixed-rate switch is only available if the RE provides such an option.

What it means for you

Banks gain more flexibility to retain customers by lowering spreads before the three-year lock-in period, which could help in competitive pricing and customer loyalty. The optional fixed-rate switch reduces compliance burden for lenders on personal loan resets, but borrowers lose the guaranteed right to switch to fixed rates. Lenders must ensure any spread reduction is policy-driven and non-discriminatory to avoid regulatory scrutiny.

Historical instruction — do not use for current compliance. This is what was required at the time; it no longer reflects current RBI requirements. If no replacement rule is linked above, that only means none is recorded on our register yet — it does not prove no later applicable rule exists. Confirm on the official RBI source below.

What banks were required to do at the time

Update your board-approved policy to define justifiable grounds and non-discriminatory criteria for early spread reduction on loan categories.
Revise personal loan product terms to clearly state whether the fixed-rate switch option at reset is offered, and if so, the number of switches allowed.
Train loan officers and customer-facing staff on the revised optional nature of fixed-rate switches and the new spread reduction flexibility.
Review and update internal systems and loan documentation to reflect the changes effective October 1, 2025.

Who it affects

Retail and personal loan borrowers with floating-rate EMIs, Banks and NBFCs offering floating-rate personal loans, Risk and product teams managing loan pricing and retention strategies, Compliance and legal departments updating policy documents

❓ Common questions

Regulatory timeline

Stated effective date Effective October 1, 2025
Decoded by BankPulse 2026-06-18 01:01 IST
repealed_by — Consolidation of Regulations — Withdrawal of circulars (28 Nov 2025)
Status change: withdrawn 03 Aug 2026, 04:00 IST

Built from our lineage records — each fact carries its provenance; missing history simply is not shown (never guessed).

Can banks now reduce spreads on loans before three years for any reason?

No, only for customer retention on justifiable grounds, in a non-discriminatory manner, and as per the bank's board-approved policy. It is not a blanket relaxation.

Is the fixed-rate switch option at reset mandatory for lenders?

No, it is now optional. Regulated entities may choose to provide the option as per their board-approved policy, and they can also decide how many times a borrower can switch during the loan tenor.

When do these amendments take effect?

Both amendments come into force from October 1, 2025.

📜 This document’s life story (1 recorded event, each backed by RBI’s own words)

Repealed by RBI/2025-26/100 — Consolidation of Regulations — Withdrawal of circulars (28 Nov 2025)

RBI’s words: “Official withdrawal register entry #23: DOR.CRE.REC.51/13.03.00/2025-26 — "Reserve Bank of India (Interest Rate on Advances) (Amendment Directions), 2025" dated September 29, 2025”

📜 Read the original circular — full text as issued by RBI

RBI/2025-26/83
 DOR.CRE.REC.51/13.03.00/2025-26
 September 29, 2025
 Reserve Bank of India (Interest Rate on Advances) (Amendment Directions), 2025 
 Please refer to the Reserve Bank of India (Interest Rate on Advances) Directions, 2016 (‘Directions’) and the Circular on Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans dated August 18, 2023 (‘Circular’) , read with FAQs issued on January 10, 2025 (‘FAQs’) .
 2. On a review, in exercise of the powers conferred by the sections 21, 35A and 56 of the Banking Regulation Act, 1949 and Section 45JA, 45L and 45M of the Reserve Bank of India Act, 1934 and sections 30A and 32 of the National Housing Bank Act, 1987, the Reserve Bank being satisfied that it is necessary and expedient in the public interest to do so, hereby issues the following Amendment Directions. 
 A. Reserve Bank of India (Interest Rate on Advances) Directions, 2016 
 In Chapter – IV, the following proviso shall be inserted after sub-paragraph 8 (e):
 Provided that, the other spread components may be reduced by banks for a loan category earlier than three years for customer retention, on justifiable grounds, in a non-discriminatory manner, and in terms of the bank’s policy. 
 B. Circular dated August 18, 2023 on Reset of Floating Interest Rate on EMI based Personal Loans 
 Paragraph 2 (ii) shall be modified as under:
 At the time of reset of interest rates, REs shall may, at its option , provide the option a choice to the borrowers to switch over to a fixed rate as per their Board approved policy. The policy, inter alia, may also specify the number of times a borrower will be allowed to switch during the tenor of the loan.
 C. FAQs on Reset of Floating Interest Rate on EMI based Personal Loans 
 (i) Answer (b) to FAQ No 3 shall be modified as under:
 (b) Switch to fixed interest rate for the remaining portion of the loan, where such an option is provided by the RE ; and
 (ii) FAQ Nos 4 and 5 shall be deleted.
 3. The above amendments shall come into force from October 1, 2025.
 (Vaibhav Chaturvedi)
 Chief General Manager

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2025-26/83 · issued 29 Sep 2025. The plain-English explanation above is BankPulse’s own independent summary.

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BankPulse Compliance Evidence Pack — generated 03 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly).
Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12902&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.