Banking & Finance Updates September 2026

1.  RBI's Draft Interest Rates on Loans and Advances Directions, 2026

 A Unified Framework for Loan Pricing

In August 2026, the Reserve Bank of India (RBI) released the draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026, proposing a comprehensive framework for the way regulated entities determine and apply interest rates on loans. While the Indian banking sector has long operated under a patchwork of institution-specific instructions, the draft Directions seek to bring much-needed consistency to interest rate regulation across banks, cooperative banks, regional rural banks (RRBs), all-India financial institutions and NBFCs. If finalised in their present form, the Directions will come into effect from 1 April 2027.

Board Oversight and Governance in Loan Pricing

At their core, the proposed Directions are aimed at improving transparency, standard-ising pricing practices and strengthening borrower protection. The RBI has proposed that every regulated entity maintain a Board-approved policy governing loan pricing, including the methodology for determining benchmarks, spreads and risk premiums. This reflects the regulator's growing emphasis on internal governance and accountability in lending decisions.

Daily Interest Calculation and Agricultural Lending

One of the more significant proposals relates to the way interest is calculated. The draft requires interest to be computed on a daily reducing balance basis using the Actual/Actual day-count convention. Interest would generally be charged at monthly rests, although special treatment has been retained for agricultural advances to reflect crop cycles and repayment patterns. Importantly, in the case of short-duration crop loans, interest may be aligned with harvest and repayment seasons, and compounding would occur only when an instalment becomes overdue.

Caps on APR and Charges for Small-Value and Agricultural Loans

The draft also contains several measures that are clearly intended to strengthen consumer protection. Notably, regulated entities would be required to explicitly put a ceiling on the Annual Percentage Rate (APR), inclusive of interest and other charges or fees, applicable to microfinance loans and small-value loans, with small-value loans being personal loans to individuals where the principal amount does not exceed ₹50,000. In addition, the total interest and all other charges or fees on short-term agricultural loans and advances to small and marginal farmers cannot exceed the principal amount borrowed. For this purpose, a short-term loan is one with an original tenor of up to one year. These provisions are likely to be particularly relevant for states such as Telangana and Andhra Pradesh, where agricultural lending and microfinance continue to play an important role in credit delivery and financial inclusion.

Greater Predictability in Floating-Rate Loans

The RBI has also sought to bring greater predictability to floating-rate lending. Commercial banks will continue to be required to link specified floating-rate personal loans and MSME loans to external benchmarks. Borrowers must be informed of the benchmark used, the frequency of reset and the mechanism through which interest rates will change over the life of the loan. In a market where borrowers often struggle to understand pricing revisions, this proposal could substantially improve transparency.

Guardrails on Loan Spread Repricing

Another noteworthy aspect of the draft is its treatment of loan spreads. While lenders retain flexibility to account for credit risk, operating costs and commercial considerations, the RBI has proposed guardrails against frequent repricing. Credit risk premiums may be revised when there is a change in the borrower's credit profile, while other components of the spread generally cannot be revised for three years in floating-rate loans.

Looking Ahead: Towards More Transparent Loan Pricing

Taken together, the proposed Directions represent far more than a technical consolidation exercise. They signal the RBI's intention to make loan pricing more transparent, predictable and borrower-friendly while preserving sufficient flexibility for lenders to manage risk. As the consultation process progresses, banks, NBFCs and cooperative institutions across India, including those operating in Telangana and Andhra Pradesh, will be closely watching the final form of these Directions and the operational changes they may necessitate.

Source: RBI Draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026, released on 12 August 2026

2.  From Paper Ledgers to the Cloud: Banking Evidence Gets a Digital Upgrade

 Bankers’ Books Evidence Act, 2026                         

On 3 August 2026, Finance Minister Nirmala Sitharaman introduced the Bankers’ Books Evidence Bill, 2026 in the Lok Sabha. The Bill was passed by the Lok Sabha on 5 August 2026 and by the Rajya Sabha on 10 August 2026. Following Presidential assent on 13 August 2026, it has been enacted as the Bankers’ Books Evidence Act, 2026, replacing the Bankers’ Books Evidence Act, 1891. The 2026 Act seeks to align the law governing banking evidence with contemporary banking practices, where records are increasingly electronic, digital and cloud-based. The Act will come into force on a date to be notified by the Central Government.¹

The change is not merely about replacing an old statute, it reflects something we experience every day. Banking has moved far beyond physical ledgers. Today, a transaction may exist as a UPI payment, electronic account entry, digital record or cloud-stored information. The Bill responds to this shift by expanding the definition of “bankers’ books” under Section 2 to include physical, electronic, digital, cloud-based and other data-storage formats, including backup and disaster-recovery sites. In simple terms, the “bank book” does not have to be a book anymore.

Section 3 recognises certified copies of physical and electronic banking records and prescribes requirements for their certification. Digital records may be certified through manual, digital or electronic signatures in accordance with the Information Technology Act, 2000.” Section 4 also empowers the Central Government to extend the application of the Act to the books of entities or classes of entities operating in the financial sector, subject to such conditions, exceptions or modifications as may be specified by notification.

Sections 6 and 7 further provide that electronic and digital copies of banking records cannot be denied admissibility merely because they are maintained in electronic or digital form. The Bill also prescribes safeguards relating to system integrity, authorised access, accuracy of data, cybersecurity and absence of tampering. The bill could have a direct impact on banking litigation. Earlier, the law had to accommodate these developments within a framework created in 1891.

Under Section 8, bank officers ordinarily cannot be compelled to produce original bankers’ books or appear as witnesses where certified copies are sufficient, unless the Court records special reasons. For litigation involving large volumes of electronic records, this could reduce unnecessary appearances and procedu-ral delays and make the handling of banking evidence more efficient. Section 9 also permits the court to order inspection or production of certified copies where required.

But every digital convenience comes with a question of safeguards. One of the notable points of debate has been access to banking information during investigations. While the government has emphasised safeguards and privacy, concerns have been raised over provisions allowing senior police officers to seek banking records without first obtaining a judicial warrant.

That makes the new law more than a technology upgrade. It sits at the intersection of banking, evidence, technology and privacy. The 1891 law was created when banking records were physical objects sitting inside branches. More than a century later, those records can travel across digital systems and clouds in seconds. The bank book may have left the shelf. Now, the law has to keep up with where the data lives.

3.  RBI’S New Rules on Loan Recovery Agents

Introduction                                                                          

In a significant regulatory development aimed at protecting borrowers from coercive recovery practices, the Reserve Bank of India (RBI), on   commercial banks, small finance banks,

6 August 2026, issued a set of Amendment Directions introducing comprehensive requirements on the conduct of regulated entities in recovery of loans and engagement of recovery agents. The Directions, effective from 1 January 2027, introduce comprehensive recovery-related requirements across regional rural banks, cooperative banks, All India Financial Institutions, NBFCs and HFCs, subject to the respective regulatory frameworks and specified exclusions.

This represents one of the RBI’s most significant consumer protection measures, in the lending sector in recent years, responding to growing concerns over aggressive recovery practices. The 2026 Amendment Directions represent RBI’s broader effort to make loan recovery more transparent and humane in India’s digital lending ecosystem.

Key Mandates and Structural changes

The Directions introduce several structural safeguards. Every regulated entity must now put in place a documented recovery policy, approved in accordance with its governance framework, covering matters such as the triggers for initiating recovery, escalation mechanisms, and the code of conduct for employees and recovery agents. All recovery-related communication must be recorded, creating an auditable trail that can be examined in the event of a regulatory inspection, while borrowers must be clearly informed of the identity and authorisation of any agent reaching out to them, curbing impersonation and unauthorised third-party involvement.

Governance and Compliance Implications

RBI’s Directions signals that lenders can no longer distance themselves from the conduct of recovery agents. By requiring formal certifi-cation, documented oversight, and clear accountability, the RBI is placing responsib-ility on regulated entities and their senior management to ensure that outsource recovery practices comply with borrower protection standards.

For NBFCs and digital lenders in particular, this will likely necessitate renegotiated vendor contracts, investment in call recording infrastructure, and formal training pipelines to ensure agent certification before the January 2027 deadline.

Impact on Lenders and the Credit Ecosystem

In the immediate term, regulating entities will face increased compliance costs due to certification programs, technology upgrades for call recording, and policy documentation. All carry financial and operational overhead. Smaller NBFCs and fintech lenders, which often rely heavily on third party recovery agencies, may feel this impact most acutely. The broader implication, however, extends to lending discipline itself.

A Recalibration of Borrower Protection

This episode reflects more than a procedural tightening; it signals a recalibration of the power balance between lenders and borrowers in India's credit market. The assumption that recovery is a purely commercial, lender driven process is being replaced by a framework in which borrower dignity and due process are explicit regulatory expectations, not optional courtesies.

RBI's action underscores that as lending, particularly digital and small ticket lending has scaled rapidly, recovery practices must scale in accountability alongside it.

Conclusion

The RBI’s 2026 amendments on recovery of loan dues and engagement of recovery agents reinforce the principle that credit growth cannot come at the cost of borrower dignity and due process. For lenders from large banks to small digital NBFCs, sustainable growth in the recovery function will depend not just on efficiency in collections, but on documented governance, trained personnel, and verifiable accountability. While the immediate effect may be higher compliance costs, the long term outcome is likely to be a more trustworthy and stable lending ecosystem for both borrowers and lenders.

4.  RBI’s Third Amendment Directions, 2026: Advancing the Deadline for FCNR(B) and NRE Deposit Rate Relaxation

Introduction                                                                  

On 25 August 2026, the Reserve Bank of India (“RBI”) issued the Third Amendment Directions under Section 35A of the Banking Regulation Act, 1949. The RBI issued corresponding amendments to the interest rate on deposits frameworks applicable to different categories of banks, including commercial banks, small finance banks, local area banks, regional rural banks and cooperative banks.

The Amendment Directions modify the Reserve Bank of India (Commercial Banks - Interest Rate on Deposits) Directions, 2025, dated 28 November 2025 (updated as on 17 June 2026), by advancing the closing date of a temporary interest rate relaxation on select NRI deposit products from 30 September 2026 to 31 August 2026. The relaxation, first introduced with effect from 17 June 2026, had withdrawn the interest rate ceiling on fresh Foreign Currency Non-Resident (Bank) [“FCNR(B)”] deposits of three-to-five-year tenors and removed the restriction on interest rates payable on fresh Non-Resident External (“NRE”) deposits of three years and above, including renewals upon maturity. The present Amendment Directions do not alter the substantive relaxation itself but curtail, by one month, the period during which banks may mobilise deposits under the dispensation.

Background: The June 2026 Relaxation Framework

Under the relevant provisions of the 2025 Directions, interest rate ceilings ordinarily apply to FCNR(B) deposits of three-to-five-year maturity, based on the applicable Overnight Alternative Reference Rate (“OARR”) or swap rate and the prescribed margin, while NRE deposit rates are subject to the applicable regulatory ceiling.

Against the backdrop of pressures on the rupee and the need to strengthen foreign currency inflows, the RBI temporarily suspended both restrictions with effect from 17 June 2026, with the objective of encouraging overseas Indians to route foreign currency savings into Indian banks and supporting the country’s external balance of payments. The relaxation applied only to fresh deposits and renewals upon maturity; transfers from Non-Resident Ordinary (“NRO”) accounts into NRE accounts were expressly excluded from the exemption.

The Special Swap Facility and Its Response

Concurrently with the rate relaxation, the RBI introduced a special US Dollar-Rupee swap facility on 8 June 2026, permitting banks to swap fresh FCNR(B) deposit inflows, along with eligible External Commercial Borrowings (“ECBs”) and Overseas Foreign Currency Borrowings (“OFCBs”), directly with the central bank. The swap mechanism allowed banks to offer competitive rates on NRI deposits without carrying the associated currency hedging cost, since the RBI absorbed the resulting foreign-currency exposure.

According to RBI data reported by Authorised Dealer Banks as of 13 August 2026, FCNR(B) deposits mobilised under the scheme had crossed USD 52.3 billion, while combined inflows across the FCNR(B), ECB and OFCB channels exceeded USD 56.8 billion.

The Third Amendment Directions, 2026

The present Amendment Directions align the interest rate relaxation with the shortened FCNR(B) swap-facility timeline. The window for mobilising FCNR(B) deposits under the swap facility closed on 31 August 2026, while swaps against such deposits could be availed with the RBI until 11 September 2026. The corresponding swap facility for eligible ECBs and OFCBs continues until 31 December 2026.

Against this backdrop, advancing the end date for the FCNR(B) and NRE deposit rate relaxation from 30 September 2026 to 31 August 2026 brings the rate dispensation into line with the revised mobilisation cut-off for FCNR(B) deposits. Retaining the relaxation beyond the FCNR(B) mobilisation window could otherwise have created a period in which banks could continue to mobilise deposits at relaxed rates after the corresponding window for mobilising FCNR(B) deposits under the RBI’s swap facility had closed.

The amendment is therefore principally a change to the sunset date of the June 2026 relaxation, rather than a change to the substantive terms of the interest rate dispensation itself inflows across the FCNR(B), ECB and OFCB channels exceeded USD 56.8 billion.

Conclusion and Way Forward

The Third Amendment Directions, 2026 illustrate the RBI’s continued calibration of its NRI deposit relaxation measures in response to actual market mobilisation rather than adherence to a fixed timeline. Having achieved substantial foreign currency inflows, the central bank has chosen to bring the FCNR(B) deposit mobilisation window and the corresponding interest-rate dispensation to an earlier close, aligning the two measures more closely.

Going forward, banks would be well advised to align their NRI deposit mobilisation strategies with the revised 31 August 2026 cut-off, while market participants may watch for further guidance on whether the RBI extends similar relaxations, restores the pre-June 2026 rate ceilings without modification, or introduces a fresh dispensation calibrated to prevailing exchange rate conditions.

Footnotes

^{1 Bankers’ Books Evidence Act, 2026 circular (No. 15 of 2026)}