The Reserve Bank of India (RBI) on Friday issued detailed guidelines to reset floating-interest rates on Equated Monthly Instalments (EMI)-based
personal loans. According to RBI, all registered entities (REs) should clearly communicate to the borrowers about the possible impact of change in the benchmark interest rate on the loan, leading to changes in the EMI and/or tenure.
“Any increase in the EMI/tenure or both on account of this shall be communicated to the borrower immediately through appropriate channels,” RBI said in a release.
This move will impact all floating-rate personal loan borrowers including home loan and auto loan borrowers.
This development comes days after
RBI in its August policy announced plans to establish a transparent framework for the resetting of interest rates on floating-rate loans. While making the bi-monthly monetary policy announcement, RBI Governor Shaktikanta Das revealed that the central bank will soon introduce a framework allowing borrowers to transition from floating interest rates to fixed interest rates.
What do the guidelines say?
RBI said all applicable charges for switching loans from floating to
fixed rate and any other service charges/administrative costs incidental to the exercise of the options shall be transparently disclosed in the sanction letter and also at the time of revision of such charges/costs by the REs from time to time.
"At the time of reset of interest rates, REs shall provide the option to the
borrowers to switch over to a fixed rate as per their board-approved policy.
The policy, inter alia, may also specify the number of times a borrower will
be allowed to switch during the tenure of the loan. The borrowers shall also be given the choice to opt for (i) enhancement in EMI or elongation of tenor or for a combination of both options; and, (ii) to prepay, either in part or in full, at any point during the tenor of the loan. Levy of foreclosure charges/ pre-payment penalty shall be subject to extant instructions," RBI said.
The central bank further asked REs to ensure that the elongation of tenor in case of a floating rate loan does not result in negative amortisation.
"REs shall share/make accessible to the borrowers, through appropriate
channels, a statement at the end of each quarter which shall be at the
minimum, enumerate the principal and interest recovered to date, EMI
amount, number of EMIs left, and annualized rate of interest/Annual
Percentage Rate (APR) for the entire tenor of the loan. The REs shall
ensure that the statements are simple and easily understood by the
borrower," it said.
RBI further asked REs to ensure that these instructions are extended to the existing as well as new loans suitably by December 31, 2023. All existing borrowers shall be sent a communication, through appropriate channels, intimating the options available to them.
The impact
This move aims to provide relief to individuals with personal loans who have been grappling with the burden of high-interest rates. The framework will primarily focus on enhancing communication with borrowers regarding any changes in loan schedules and adjustments to equated monthly instalments (EMIs).
Understanding floating and fixed interest rate loans
The floating interest rate is volatile and keeps on changing as per the market scenario. This type of interest rate depends on the base rate offered by several lenders, so whenever the base rate changes, the interest rate gets automatically revised. This can be seen whenever RBI makes changes to its repo rate and the same is passed on to the borrowers.
On the other hand, people who opt for fixed home loan interest rates have to repay the home loan in fixed and equal instalments as per the
loan tenure. The advantage of a fixed interest rate is that it would not change even if there are fluctuations or changes in the Indian financial market conditions or trends.
