Switch over to fixed interest rate, info on loan rate changes: RBI’s big step for borrowers

The RBI on Friday (August 18) asked banks and other lenders to provide borrowers an option to switch over to a fixed rate at the time of reset of interest rates.

In a notification, the RBI said in respect of EMI-based floating rate personal loans, in the wake of rising interest rates, several consumer grievances related to elongation of loan tenor and/or increase in EMI amount, without proper communication with and/or consent of borrowers have been received.

The RBI has asked entities regulated by it to put in place an appropriate policy framework in order to address these concerns.

What are RBI’s new guidelines with respect to loans, interest rates?

• RBI said that at the time of sanction, REs shall clearly communicate to the borrowers about the possible impact of change in benchmark interest rate on the loan leading to changes in EMI and/or tenor or both.
• Any increase in the EMI/ tenor or both on account of the above shall be communicated to the borrower immediately through appropriate channels.
• It further said that at the time of reset of interest rates, Regulated Entities (REs) should provide an option to borrowers to switch over to a fixed rate as per their board-approved policy.
• The policy, RBI added should specify the number of times a borrower will be allowed to switch during the tenor of the loan.
• Borrowers should also be given a choice to opt for enhancement in EMI or elongation of tenor or for a combination of both options.
• They should also be given an option to prepay, either in part or in full, at any point during the tenor of the loan.
• Levy of foreclosure charges/ pre-payment penalty should be subject to extant instructions.
• “REs shall ensure that the elongation of tenor in case of floating rate loan does not result in negative amortisation,” the circular said.
• Futher, REs should make accessible to the borrowers a statement at the end of each quarter containing details like the principal and interest recovered till date, EMI amount, number of EMIs left and annualised rate of interest / annual percentage rate for the entire tenor of the loan.

What is the cutoff date for RBI’s new guidelines?

According to the RBI, banks and NBFCs have been asked to ensure compliance of the instructions for the existing as well as new loans by December 31, 2023.

(With PTI inputs)

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