RBI proposes bringing NBFCs and HFCs under interest rate regulation for the first time
· Reported by Vinod Kothari Consultants
The RBI has issued draft Interest Rates on Loans and Advances Directions, 2026 that for the first time apply detailed interest rate rules, including monthly interest charging and daily reducing balance computation, to NBFCs and housing finance companies. The new rules would apply to new loans from April 1, 2027, with all existing loans required to migrate to the new framework by April 1, 2029.
What this changes for a title check
For NBFC and HFC legal and compliance teams, this draft direction is the first time RBI interest rate regulation reaches beyond banks. Loan agreements, especially for fintech and small ticket lenders that currently quote a flat rate of interest, will need to move to daily reducing balance computation and monthly interest charging, since a flat rate disclosure will no longer satisfy the rules. Every regulated entity will need a published methodology document explaining how its benchmark and spread are set, even though the benchmark number itself can stay internal for NBFCs. Loan transfer and assignment documentation needs a new clause addressing which entity's interest framework applies after a transfer, since the direction ties this to whether the lender of record changes. Legal teams should also plan a borrower consent process for migrating existing loans by April 1, 2029, since the transition cannot make any borrower worse off and cannot carry a transition fee. Small value and microfinance lenders specifically need an internal APR ceiling policy in place before the 2027 effective date.