RBI rate framework may limit HFC pricing flexibility, speed up bank rate transmission to NBFCs: Kotak

According to the central bank’s proposed framework, floating‑rate loans must be set above the benchmark rate.

Kotak Institutional Equities noted in a report that the RBI’s suggested revisions to loan‑rate regulations might limit the pricing leeway of major prime HFCs, yet accelerate the pass‑through of bank rate shifts to NBFCs.

Key Takeaways

• Kotak Institutional Equities says RBI’s proposed loan-rate rules could limit pricing flexibility for major prime HFCs.
• The new framework requires floating-rate loans to be priced above the benchmark rate, curbing the ‘PLR minus’ discount approach.
• Large prime-segment HFCs with thin spreads could be hit hardest as new-versus-existing borrower rate gaps shrink.
• The changes are expected to speed up bank rate transmission to NBFCs more broadly.

Kotak warned that HFCs which presently rely on an internal prime lending rate (PLR) and extend home loans at a discount to the benchmark could be impacted, since the RBI’s plan would require floating‑rate loans to be priced above the benchmark, curtailing the flexibility of the existing “PLR minus” approach.

The brokerage pointed out that large prime‑segment HFCs, especially those with thin spreads, could suffer because the new framework might shrink the gap between rates for new and existing borrowers. At present, lenders can cut rates for new customers when rates fall, while existing borrowers often keep paying higher rates. Kotak remarked, “The new MCLR+ regime would erase or diminish this flexibility, which is unfavorable for these HFCs.” It added that in a declining rate environment, HFCs could tie prime home loans to external benchmark‑linked lending rates (EBLR) to stay competitive.

The report noted that affordable housing finance firms are likely to feel less impact, given their typically wider gross spreads and loans priced well above their cost of funds. Kotak added that EBLR would not be compulsory for NBFCs or HFCs under the proposed rules, easing worries about a forced move to external benchmarks.

The RBI’s draft guidelines aim to harmonise interest‑rate practices among all regulated lenders. They propose that floating‑rate loans be reset at most every three months, with existing floating‑rate loans required to migrate to the new regime by April 1, 2029. Kotak observed that the tighter reset schedule could affect NBFCs more broadly, since many of their bank borrowings are tied to the MCLR and are presently repriced only once a year.

Under the proposed system, those borrowings could be adjusted every quarter, enabling faster transmission of bank rate changes to NBFCs. Kotak said the guidelines are slated to take effect from April 2027, providing lenders ample time to adapt and comply.

Published on August 14, 2026