RBI draft keeps external benchmark optional for NBFCs in loan-rate rules

RBI’s draft norms offer flexibility to NBFCs

The Reserve Bank of India (RBI) has released a draft framework for linking loan rates to external benchmarks, but in a significant departure from earlier expectations, it has kept such benchmarking optional for non-banking financial companies (NBFCs). The move gives NBFCs the leeway to continue using internal benchmarks, provided they adhere to transparency and disclosure requirements.

The draft, published by the central bank, is aimed at bringing uniformity to how NBFCs set and revise interest rates on floating-rate loans. Unlike banks, which were earlier mandated to link such loans to external benchmarks like the repo rate, NBFCs will have the choice to adopt external benchmarks or stick to their internal methodologies.

Why optional? A calibrated approach

Industry watchers say the RBI's decision reflects the diversity in the NBFC sector, where smaller players may lack the infrastructure to seamlessly transition to external benchmarks. By keeping the provision optional, the regulator appears to be balancing transparency goals with operational practicality.

The draft also proposes that NBFCs opting for external benchmarks must choose from standard rates such as the RBI's policy repo rate, the Treasury Bill yield, or any other benchmark published by the Financial Benchmarks India Private Ltd (FBIL). Those choosing internal benchmarks, however, will need to ensure that their rate-setting process is robust and clearly communicated to borrowers.

Transparency remains the cornerstone

Even with the optional clause, the RBI has made it clear that customer protection remains a priority. NBFCs will be required to disclose the methodology for rate revision, the spread charged over the benchmark, and the frequency of reset. This is intended to prevent arbitrary rate hikes and enhance borrower trust.

For NBFCs that already link a significant portion of their loan book to external benchmarks, the new rules will formalise existing practices. For others, the optionality provides breathing room to upgrade systems without immediate disruption.

What this means for borrowers

For borrowers, the practical impact will depend on the NBFC they choose. Those with external benchmark-linked loans may see more predictable rate movements tied to policy changes. In contrast, internal benchmark-linked loans could still carry some opacity, though the draft seeks to mitigate this through mandatory disclosures.

The RBI has invited comments from stakeholders, including NBFCs, industry bodies, and consumer groups, before finalising the rules. The timeline for implementation remains unclear, but the central bank is expected to issue a final circular after reviewing feedback.

Industry response and road ahead

Initial reactions from the NBFC sector have been cautiously positive. Many see the optional clause as a pragmatic step that recognises the sector's heterogeneity. However, some experts argue that a mandatory external benchmark would have been more effective in ensuring rate transmission.

As the consultation process unfolds, all eyes will be on the final rules and whether the RBI tightens the optionality clause based on feedback. For now, NBFCs can take comfort in the flexibility offered, while borrowers await clearer rate-setting norms.