Reserve Bank of India (Local Area Banks – Interest Rates on Advances) Directions, 2025

1. Starts at once

The rules start the moment RBI issues them.

2. Who must follow this

These rules apply to every local area bank.

1. Fixed or floating, bank's choice

The bank is free to offer any advance at a fixed or a floating rate.

2. Benchmark plus spread

The lending rate is the benchmark rate plus the parts of the spread.

3. Short fixed loans priced up

A fixed rate loan under three years cannot price below the benchmark.

4. Interest every month

Interest is charged on all advances at monthly rests.

5. Interest cannot pass the loan

For a small or marginal farmer the interest debited cannot exceed the principal.

6. Farmers are treated apart

On a long duration crop the bank may charge interest at annual rests.

7. Small loan rates be fair

The rate on a small personal loan must be justifiable against real cost.

8. The board writes the policy

A full board-approved policy on lending rates is required, microfinance included.

9. The benchmark goes in writing

The benchmark used for pricing must be written into the loan contract.

10. Round to the rupee

Interest on a rupee advance is rounded off to the nearest rupee.

1. Three old systems still run

Loans up to June 2010, then to March 2016, then after it, price differently.

2. Only one Base Rate

A bank can have only one Base Rate.

3. MCLR after April 2016

Floating rupee loans from April 1, 2016 are priced on the MCLR.

4. What goes into MCLR

Marginal cost of funds, negative carry on CRR, operating costs and tenor premium.

5. Tenor premium is for everyone

A change in tenor premium cannot single out a borrower or a loan class.

6. Thirty percent decides the tenor

A maturity bucket counts for the MCLR tenor only above 30 percent of funds.

7. Retail and MSME go outside

Floating personal, retail and MSME loans must sit on an external benchmark.

8. One benchmark per loan type

Within a loan category the bank must use one external benchmark only.

9. No mixing benchmarks

Two different benchmarks inside one loan category are not allowed.

10. Base Rate every quarter

The Base Rate is reviewed at least once in a quarter.

11. MCLR every month

The MCLR is reviewed and published every month on an announced date.

1. Same rule under Base Rate

Under the Base Rate the premium moves only on risk or on tenor premium.

2. Worse borrower pays more

The credit risk premium goes up only if the borrower's own risk got worse.

3. The spread cannot be negative

Business strategy and credit risk premium are positive or zero, never below.

4. Outside benchmark, free spread

Over an external benchmark the bank decides the spread itself.

5. Costs change in three years

The operating cost part of the spread may change once in three years.

6. The rate at first draw

The MCLR on the first drawdown holds until the next reset date.

7. Reset a year or sooner

Under MCLR the reset happens once a year or more often.

8. Old loans may move over

An existing borrower may switch to an MCLR loan on agreed terms.

9. Switching is not closing

A switch-over is not treated as closing the old facility early.

10. Free switch for some

Borrowers who may prepay without charge switch to the external benchmark free.

11. A spread policy as well

The board must also approve a policy setting out each part of the spread.

12. Outside rate every three months

A loan on an external benchmark is reset at least once in three months.

BankPulse example. A home loan sits on the repo rate. The repo moves in February and the borrower's rate has not changed by May. Three months have passed, so the reset RBI names is already overdue and the branch should have repriced the loan.

13. Base Rate is still published

The bank keeps reviewing and publishing its Base Rate as before.

1. Foreign currency is free

The bank sets its own rates on advances in foreign currency, under its policy.

2. But on a market benchmark

Those rates still hang off a market determined external benchmark.

1. Long fixed loans are outside

A fixed rate loan of more than three years is outside the benchmark rules.

2. Government schemes are outside

A loan under a government scheme carries the scheme's own rate.

3. Loans against own deposits

A loan to a depositor against his own deposit is outside these pricing rules.

4. Loans to own staff

Loans to the bank's own employees, serving or retired, are outside them too.

5. Loans to the top officers

So are loans to the chief executive and whole time directors.

1. Old rules stand repealed

The earlier lending rate rules for these banks are repealed.

2. Old actions still stand

Anything done under the old rules stays governed by those old rules.

3. Old approvals still count

Approvals given under the repealed rules now come under these rules.

4. Other laws still apply

These rules add to other laws. They do not cut them down.