While banking is a competitive space, customer choice becomes effective only when information is freely available.
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Interest rates on loans and advances on similar products tend to vary greatly across banks, NBFCs and other financial institutions. While part of the variation can be explained by factors such as the differences in sources of funds, risk-profile of the borrowers and the benchmarks used, many lenders misuse the absence of clear guidelines to charge usurious rates.While banking is a competitive space, customer choice becomes effective only when information is freely available. To this end, the Reserve Bank of India has sought to create a harmonised set of standards for determining interest rates across lenders, including commercial banks, regional rural banks, cooperative banks, all-India financial institutions and NBFCs. A consultation paper on this issue is open for comments. Its wide scope is aimed at ensuring that small borrowers who are not serviced by commercial banks are not cheated. A major suggestion in the paper pertains to asking all regulated lenders to put an upper limit on the annual percentage rate (which includes interest rate, charges and fees) they will charge small borrowers who take loans below ₹50,000, and micro finance loans. RBI must also ask all lenders to display this upper limit prominently on all their banking portals and offices. A proposal stating that the total interest, charges and fees on short-term agricultural loans should not exceed the principal amount will protect small farmers.The paper makes another welcome suggestion — setting out clear disclosures for calculating marginal cost-based lending rate and asking specified lenders to display the same at the beginning of each month on all platforms. RBI has proposed that MCLR should be the moving average of the costs of domestic deposits and borrowings in the previous three months. But the consultation paper seeks to exempt banks with deposits under ₹1,000 crore and all NBFCs from having to compute MCLR. Instead, they are being allowed to arrive at the MCLR based on their internal policy, requiring the methodology alone to be made public. This exemption goes against the intent to stop mispricing loans, and protecting small borrowers. Similarly, the guidelines provided for arriving at the spread above the benchmark rate charged by lenders could have been more elaborate.The paper seems to veer towards micro-management. For instance, suggesting that interest rates should be charged every month is not necessary for all types of loans. The lender can determine this, based on the loan category, borrower’s profile and preference. Similarly, lenders can be left to determine the interval at which they will reset the benchmark for floating rate loan. They may want to waive interest, in collaboration with vendors. A stipulation that the interest rate cannot be below the benchmark rate, impedes such discount schemes. A balance needs to be struck between transparency and freedom to take competitive business decisions.Published on August 14, 2026
