Small Finance Banks Interest Rates on Advances Directions 2025

RBI/DOR/2025-26/192 DOR.CRE.REC.111./13.03.000/2025-26 November 28, 2025 Reserve Bank of India (Small Finance Banks - Interest Rates on Advances) Directions, 2025 Table of Contents Chapter I - Preliminary Chapter II - General guidelines Chapter III - Benchmark Chapter IV - Other aspects of lending rates Chapter V - Foreign Currency Advances Chapter VI - Exemptions Chapter VII - Repeal and Other Provisions Annex In exercise of the powers conferred by Sections 21 and 35A of the Banking Regulation Act, 1949, and all other provisions / laws enabling the Reserve Bank of India ('RBI') in this regard, RBI being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the Directions hereinafter specified. Chapter I - Preliminary A. Short Title and Commencement

1. These Directions shall be called the Reserve Bank of India (Small Finance Banks - Interest Rates on Advances) Directions, 2025.
2. These Directions shall come into effect immediately upon issuance. B. Applicability
3. These Directions shall be applicable to Small Finance Banks (hereinafter collectively referred to as 'banks' and individually as a 'bank'). C. Definitions
4. In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them below: (1) ‘Advance against own deposit’ means advance granted against Rupee/ FCNR(B) term deposit and the deposit stands in the name of:

• (a) the borrower, either singly or jointly.
• (b) one of the partners of a partnership firm and advance is made to the said firm.
• (c) the proprietor of a proprietary concern and advance is made to such concern.
• (d) a ward whose guardian is competent to borrow on behalf of the ward and where the advance is made to the guardian of the ward in such capacity. (2) ‘Benchmark Prime Lending Rate (BPLR)’ means internal benchmark rate used to determine the interest rates on advances / loans sanctioned upto June 30, 2010. (3) ‘Benchmark rate’ means the reference rate used to determine the interest rates on loans. (4) ‘External benchmark rate’ means the reference rate which includes:
• (a) Reserve Bank of India policy Repo Rate;
• (b) Government of India Three-months and Six-months Treasury Bill yields published by Financial Benchmarks India Private Ltd (FBIL);
• (c) Any other benchmark market interest rate published by FBIL. (5) ‘Fixed rate loan’ means a loan on which the interest rate is fixed for the entire tenor of the loan. (6) ‘Floating rate loan’ means a loan on which interest rate does not remain fixed during the tenor of the loan. (7) ‘Internal benchmark rate’ means a reference rate determined internally by the bank. (8) ‘Microfinance loan' shall have the same meaning as assigned in Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025 . (9) ‘Rests’ refers to periodicity of charging interest to borrowers. (10) ‘Short term borrowing’ means borrowing of tenor up to but less than one year. (11) ‘Term loan’ means a loan which is repayable after a specified term period. (12) All other expressions, unless defined herein, shall have the same meaning as have been assigned to them under the Banking Regulation Act,1949 or the Reserve Bank of India Act, 1934 or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be. Chapter II - General guidelines A. Interest Rate Framework

5. A bank shall charge interest on its loans and advances on the terms and conditions specified in these directions. (1) There shall be a comprehensive policy duly approved by the Board of Directors or any committee of the Board to which powers have been delegated, in respect of interest rates on advances, including the pricing of microfinance loans (2) All floating rate loans, except those mentioned in paragraph 44, shall be priced with reference to a benchmark as mentioned in paragraphs 9 to 26. (3) A bank shall have the freedom to offer all categories of advances on fixed or floating interest rates. (4) When the floating rate advances are linked to a reference benchmark rate, a bank shall determine its actual lending rates by adding the components of spread to the reference benchmark rate. (5) The reference benchmark rate used for pricing the loans shall form part of the terms of the loan contract. (6) Interest rates on fixed rate loans of tenor below three years shall not be less than the benchmark rate for similar tenor and shall be as per directions contained in paragraph 44(4)(v). (7) Interest shall be charged on all advances at monthly rests. Provided that interest on agricultural advances and advance to farmers shall be charged by a bank as per below instructions:

• (a) Total interest debited in short term loan should not exceed the principal amount for advances to small and marginal farmers.
• (b) A bank may charge interest on agricultural advances at annual rests for long duration crop only.
• (c) As regards other agricultural advances in respect of short duration crops and allied activities, a bank may take into consideration due date/s fixed on the basis of fluidity with borrowers and harvesting / marketing season while charging interest and compound the same if the loan / instalment becomes overdue. (8) Interest chargeable on rupee advances shall be rounded off to the nearest rupee. (9) Interest charged on small value loans, particularly, personal loans and such other loans of similar nature shall be justifiable having regard to the total cost incurred by the bank in extending the loan and the extent of return that could be reasonably expected from the transaction. (10) In case of takeover of bank branches in rural and semi urban centres from one bank to another bank, transfer of borrowal accounts of the existing branch to the branch of acquiring bank shall be on mutually agreed terms of contract. Provided that the existing borrowers shall not be put into any disadvantage and shall have the option of continuing with the existing bank or the acquiring bank. (11) There shall be no lending below the benchmark rate for a particular maturity for all loans linked to that benchmark.

6. The directions contained in paragraph 5 above shall also be applicable to Rupee advances granted against FCNR(B) deposits to a third party or out of resources mobilised under the FCNR(B) scheme. B. Pricing of Microfinance Loans
7. A bank shall put in place a Board-approved policy regarding pricing of microfinance loans which shall, inter alia, cover the following: (1) A well-documented interest rate model / approach for arriving at the all-inclusive interest rate. (2) Delineation of the components of the interest rate such as cost of funds, risk premium and margin, etc. in terms of the quantum of each component based on objective parameters. (3) The range of spread of each component for a given category of borrowers. (4) A ceiling on the interest rate and all other charges applicable to the microfinance loans.
8. Interest rates and other charges / fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank. Chapter III - Benchmark A. Internal Benchmark A.1 Base Rate
9. All floating rate rupee loans sanctioned and renewed between July 1, 2010 and March 31, 2016 shall be priced with reference to the Base Rate which will be the internal benchmark for such purposes.
10. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers.
11. There can be only one Base Rate for each bank.
12. A bank shall have the freedom to calculate cost of funds either on the basis of average cost of funds or on marginal cost of funds or any other methodology in vogue, which is reasonable and transparent, subject to it being consistent and made available for supervisory review / scrutiny as and when required. Provided that where the card rate for deposits of one or more tenor is the basis, the deposits in the chosen tenor/s shall have the largest share in the deposit base of the bank.
13. A bank shall review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank’s practice. A.2 Marginal Cost of Funds based Lending Rate (MCLR)
14. All floating rate rupee loans sanctioned and renewed w.e.f. April 1, 2016 shall be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes subject to the provisions contained in paragraphs 24 to 26.
15. The MCLR shall comprise of:

• (a) Marginal cost of funds;
• (b) Negative carry on account of CRR;
• (c) Operating costs;
• (d) Tenor premium. A.2.1 Marginal Cost of funds

16. The marginal cost of funds shall comprise of Marginal cost of borrowings and return on networth. The detailed methodology for computing marginal cost of funds is given in the Annex . A.2.2 Negative Carry on CRR
17. Negative carry on the mandatory CRR which arises due to return on CRR balances being nil, will be calculated as under: Required CRR x (marginal cost) / (1- CRR) The marginal cost of funds arrived at paragraph 16 above shall be used for arriving at negative carry on CRR. A.2.3 Operating Costs
18. All operating costs associated with providing the loan product including cost of raising funds shall be included under this head. It shall be ensured that the costs of providing those services which are separately recovered by way of service charges do not form part of this component.
19. A bank shall calculate all operating costs as a percentage of marginal cost of funds for computing MCLR. A.2.4 Tenor premium
20. These costs arise from loan commitments with longer tenor. The change in tenor premium should not be borrower specific or loan class specific. In other words, the tenor premium will be uniform for all types of loans for a given residual tenor. Since floating rate loans are subject to periodic resets, the tenor premium will be the appropriate premium for the residual period up to the next reset date.
21. The tenor of the MCLR calculated as per the Annex shall correspond to the following: (1) the tenor of the funds in the single largest maturity bucket, provided it is more than 30 percent of the entire funds (other than equity) reckoned for determining the MCLR, or (2) the weighted average tenor of two or more maturity buckets that together account for more than 30 percent, if no single maturity bucket accounts for more than 30 percent of the funds. The maturity bucket shall be arrived at by calculating the cumulative weightage based on the descending order of the maturity time buckets. The below illustration, where no single maturity bucket accounts for more than 30 percent of the funds, is provided for the guidance of banks: