Mumbai, Aug. 12 -- The Reserve Bank of India (RBI) proposed changes to how banks and non-banks calculate interest rates, saying that lenders should cap costs for small loans taken by borrowers and microfinance customers.

It proposed that lenders put a ceiling on the annual percentage rate on microfinance loans and small value loans and ensure that they are not usurious. The central bank defines the annual percentage rate as the annual cost of credit to the borrower, which includes the interest rate and all other charges.

A personal loan of up to Rs.50,000 taken by an individual would be classified as a small value loan.

According to a microfinance sector executive, lenders at present have an interest rate range that they charge borrowe...