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.
What you must do
- 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
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.