Why transparent rate communication, a key as Repo-linked loans become norm

Mumbai, Jul 10

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday slashed the repo rate by 50 basis points to 5.5%, marking the third consecutive rate cut this year. The committee also shifted its policy stance from ‘accommodative’ to ‘neutral.’ This is the sharpest repo rate reduction since the 75-basis-point emergency cut during the Covid-19 crisis in March 2020. Since February 2025, the RBI has cut the repo rate by a total of 100 basis points, in a bid to stimulate borrowing and support growth.

As a result, most banks have adjusted their repo-linked external benchmark-based lending rates (EBLRs) and marginal cost of funds-based lending rates (MCLR), effectively making loans cheaper for borrowers. A reduction in the repo rate typically translates into lower EMIs for both retail and corporate borrowers.

According to RBI data, over 47% of outstanding home loans in India are now linked to external benchmarks, primarily the repo rate, making them highly sensitive to policy changes. While these cuts should offer relief, they’ve also highlighted a persistent challenge—borrowers often don’t fully understand how policy rate changes translate into their loan repayments.

“We’ve seen increased inbound queries from borrowers asking why their monthly instalments have gone up or down even when they didn’t opt for a new loan,” says Sumit Sharma, Founder of Radian Finserv, an NBFC focused on MSME and secured lending. “This points to a much larger issue—borrowers are still in the dark about how rate transmission works.”

While the RBI mandates transparent lending practices, the actual comprehension at the borrower level remains limited. The recent rate cuts have further exposed this gap: customers are being impacted in real time but are often not equipped with the knowledge to anticipate or interpret these changes.

Surender Kumar, CTO at iMoney Pay, echoes this concern: “Many borrowers don’t even know if a rate cut has been passed on to them. The confusing jargon—EBR, RLLR, MCLR—only adds to the chaos, especially for borrowers on older regimes who often need to fill forms, visit branches, and pay fees just to benefit from a rate cut.”

He adds, “Lenders should simply show the current effective interest rate clearly in their apps or statements—with a transparent breakup. That alone could make a big difference in borrower confidence.”

This lack of awareness is especially pronounced in Tier-2 and Tier-3 cities, where digital and financial literacy is lower and language barriers complicate communication. NBFCs and fintech lenders are now exploring proactive ways to address this.

Companies for instance, have rolled out multilingual EMI simulators and app-based alert systems to help borrowers visualise how a 50-bps repo rate change could affect their monthly outgo. Similarly, other NBFC offers a floating-rate loan tracker that notifies customers of policy rate changes within 24 hours of the RBI announcement.

At Radian Finserv, the focus is on simplifying financial communication. “We’ve developed interactive regional-language guides and app-based updates that explain the impact of rate changes using real-world examples. Our goal is to make repo rates understandable to every borrower, not just the financially savvy,” Sharma adds.

Transparency Builds Trust—and Retention

For NBFCs, transparent communication isn’t just good practice—it’s a strategic differentiator. In an increasingly commoditised lending market, building trust through clear, timely updates on interest rates and loan terms can improve borrower retention and reduce default risks.

“Borrowers may not always control interest rates, but they value knowing what’s happening and why,” says Sharma. “That visibility builds confidence in the lender and increases the likelihood of long-term engagement.”

This approach is especially relevant for MSME borrowers and first-time homebuyers, who often operate on tight margins and cannot afford sudden EMI increases—or miss out on benefits from rate reductions—without clear communication.

What’s Next: Contextual Financial Engagement

Looking ahead, borrower sentiment is likely to be shaped by RBI’s evolving policy stance. While the current rate cuts provide relief, future decisions will remain sensitive to inflation and global macroeconomic trends. Borrowers will need to stay informed and agile.

To that end, NBFC’s are piloting AI-driven notifications that will predict the EMI impact of a possible repo rate change based on a borrower’s profile—an approach that combines data science with borrower education. The companies are also exploring partnerships with regional influencers to expand financial content outreach beyond metro audiences.

As external benchmark-linked lending becomes the norm, the ability to simplify complex financial movements and empower borrowers with timely information could define the next wave of competitive differentiation in India’s lending space. NBFCs that lead with clarity—not just credit—are likely to earn long-term borrower loyalty in a repo-linked economy.

EoM.