Can banks change your loan benchmark? RBI draft says borrower consent will be needed

Borrowers may get greater protection against unilateral changes to loan benchmarks under a new framework proposed by the Reserve Bank of India (RBI). The draft rules state that if a lender changes the benchmark linked to a loan, it must obtain the borrower’s consent and ensure that the change does not put the borrower at a disadvantage.

The RBI has proposed the framework as part of a broader effort to bring greater consistency and transparency to loan pricing. The draft covers fixed and floating-rate loans, benchmark selection, interest-rate resets, spreads and the treatment of existing loans.

Borrower consent required for benchmark change

Under the proposed framework, a lender cannot simply replace the benchmark linked to a loan without the borrower’s consent. The RBI has also proposed a safeguard on the interest rate following such a change.

The new interest rate cannot be higher than the rate applicable immediately before the benchmark is changed. This is intended to ensure that borrowers do not face an immediate increase in their borrowing cost solely because the lender has moved them from one benchmark to another.

The lender would also be required to ensure that the borrower is not disadvantaged by the benchmark migration. In addition, the draft states that lenders cannot charge borrowers any fee for the migration.

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The proposed provisions could be particularly relevant for borrowers with floating-rate loans, where changes in the underlying benchmark can directly affect the interest rate and consequently the equated monthly instalment (EMI) or repayment burden.

What if a benchmark is discontinued?

The RBI draft also addresses situations where the benchmark used for a floating-rate loan is no longer available.

In such cases, the lender would have to shift the loan to another benchmark while ensuring that the borrower is not negatively impacted. The loan agreement may include a fallback provision specifying the benchmark that would apply if the original benchmark is discontinued.

This provision is aimed at providing borrowers with greater certainty about how their loan will be priced if the benchmark used in their agreement ceases to exist or is otherwise no longer available.

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Existing loans to be migrated

The proposed benchmark safeguards form part of a wider transition to a standardised interest-rate framework. The RBI has proposed that all existing loans and advances linked to an internal or external benchmark be migrated to the prescribed framework by April 1, 2029, through a one-time mapping exercise.

The draft also proposes clearer disclosure requirements for floating-rate loans. Loan agreements would need to specify the benchmark used, the frequency of rate resets and the reset date.

For most floating-rate loans, the benchmark reset period would not exceed three months. Once a reset frequency is selected, it generally cannot be changed during the tenor of the loan.

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Loan transfers also covered

The RBI has proposed separate provisions for loans transferred between lenders. If a loan is transferred but the lender officially responsible for the loan does not change, the existing interest-rate terms—including the benchmark, spread and reset mechanism—would continue.

However, if the transfer results in a change in the lender on record and the borrower signs a new agreement, the interest rate would be determined according to the new lender’s applicable pricing framework.

The proposed rules are expected to take effect from April 1, 2027, subject to the RBI’s final decision after considering feedback on the draft framework.