RBI Proposes New Loan Pricing Rules — Five Banks and NBFCs With the Most at Stake
The RBI on August 12 released draft rules aimed at harmonising how banks and NBFCs set interest rates on loans. The proposed framework would standardise rate-setting around external benchmarks, cap internal spreads, and end what analysts call "spread tinkering." For retail investors, the question is simple: which lenders benefit from transparent pricing, and which face margin pressure?
We dug into corporate filings to find out.
The policy: what’s changing
The draft rules propose tighter norms on how banks determine lending rates, with an emphasis on external benchmark-linked rates (EBLR) over the older MCLR system. While external benchmark linkage would remain optional for NBFCs, the RBI is also proposing internal ceilings on how much small borrowers pay — a direct check on spread-based pricing.
Winners: banks already on external benchmarks
Kotak Mahindra Bank (KOTAKBANK)
Kotak has been ahead of the curve. Per their FY 2024-25 annual report, 62% of their loan book was linked to the repo rate, up from 58% the prior year. By FY 2025-26, this rose to 63%. Their NIM moderated to 4.60% from 4.96%, but the bank noted this reflected "the impact of declining interest rate environment and faster repricing of floating-rate loans relative to liabilities." Kotak already runs the transparent-pricing playbook. Standardisation simply levels the playing field to their advantage.
Bank of India (BANKINDIA)
Bank of India is among the most benchmark-linked public sector banks. Per their earnings call, 94% of their loan book is floating rate — linked to either MCLR or EBLR. Their EBLR book runs at roughly 47% of total advances. Only 6% of advances are fixed rate. With housing loans offered at 8.30% for the best credit scores, they already price transparently. Standardised rules would validate their existing approach.
Under pressure: NBFCs with wide spreads
Ugro Capital (UGROCAP)
Ugro Capital’s investor presentations reveal an on-book lending spread of 4.0%, with cost of borrowing at approximately 10.5%. Their merchant lending vertical runs at an average yield of around 25%, while emerging-market LAP yields approximately 17.5%. If the RBI extends external benchmark linkage to NBFCs or imposes spread ceilings, Ugro’s high-yield products could face regulatory headwinds. Their blended liability interest cost stood at 10.6% as of March 2025.
Aavas Financiers (AAVAS)
Aavas runs a 4.89% spread — yield of 13.13% against a cost of borrowing of 8.24%, per their quarterly results. While impressive operationally, this 489-basis-point spread is exactly the kind of pricing the RBI wants to scrutinise. Aavas has been proactive: they have strategically shifted borrowings to EBLR-linked instruments (36% of their borrowings) and implemented a cumulative 25-basis-point PLR reduction. Their cost of funds improved 38 bps year-over-year. Management noted this was a "forward-looking approach" — perhaps anticipating exactly this kind of regulatory move.
The squeeze zone: thin-spread housing finance
Bajaj Housing Finance (BAJAJHFL)
Bajaj Housing Finance operates with a slim 2.1% spread — yield on loan assets of 9.7% against cost of borrowings of 7.6%, per their investor presentation. Their NIM has been around 4.1%. Management acknowledged that "large HFCs like us have to remain price takers given that banks are the price setters." With borrowing mix at 53% money market, 37% bank loans, and 10% NHB refinance, there is limited room for funding cost optimisation. New pricing rules that impose further transparency could compress this already-thin margin.
Shriram Finance (SHRIRAMFIN)
Shriram Finance presents an interesting contrast. With a NIM of 8.38% and a cost-to-income ratio of 27.95% per their FY 2025-26 annual report, they have built a defensible position in vehicle financing. Management stated they have "optimised funding mix through international borrowing" and "shifted focus to high-yield products" to maintain net interest margins at 8.55%. Shriram’s deep reach into used vehicle financing — where pricing power is stronger — may insulate it from standardisation pressures that hit consumer lending harder.
What retail investors should do
Do not panic-sell bank or NBFC stocks over this draft. These are proposals, not final rules — the RBI is seeking public comments. But do review your portfolio’s exposure:
- Banks with high EBLR-linked books (Kotak at 63%, Bank of India at 47%) are already aligned with the direction of travel. They face less disruption.
- NBFCs charging wide spreads (Ugro Capital at 4%, Aavas at 4.89%) may see margin pressure if spread caps come into effect. Watch for management commentary on how they plan to adjust.
- Housing finance companies with thin spreads (Bajaj HFL at 2.1%) have limited buffer. A falling rate environment plus tighter rules could squeeze margins further.
- Vehicle and specialty lenders (Shriram Finance at 8.38% NIM) may be less affected if the rules focus on consumer and home loan pricing.
Data sourced from company filings on NSE via Xaro.