The Reserve Bank of India (RBI) recently issued detailed guidelines regarding floating interest rates on Equated Monthly Instalment (EMI)-based personal loans. These guidelines apply to registered entities (REs) and require them to clearly communicate to borrowers the potential impact of changes in benchmark interest rates, which could lead to changes in EMI amounts and loan tenure. Any increase in EMI or tenure must be promptly communicated to borrowers.
This new directive will affect all borrowers with floating-rate personal loans, including home loans and auto loans. The RBI’s move comes shortly after its August policy announcement, where it revealed plans to establish a transparent framework for transitioning from floating interest rates to fixed rates.
The guidelines state that all charges for switching from floating to fixed rates and any other associated service fees must be transparently disclosed in the loan sanction letter and during revisions by the REs. When resetting interest rates, REs must offer borrowers the option to switch to a fixed rate based on their board-approved policy. The policy should outline the maximum number of allowable switches during the loan tenure. Borrowers should also have the choice to opt for an increase in EMI, an extension of the loan tenor, or a combination of both. Additionally, borrowers can choose to prepay partially or in full during the loan term, with foreclosure charges subject to existing instructions.
The RBI emphasizes that elongating the tenor for floating-rate loans should not result in negative amortization. It also mandates that REs provide borrowers with quarterly statements detailing principal and interest recovered, EMI amount, remaining EMIs, and the annualized rate of interest for the entire loan tenure.
These instructions must be extended to both existing and new loans by December 31, 2023. Existing borrowers will receive communication about the available options.
This initiative aims to provide relief to individuals burdened by high-interest rates on personal loans. The framework prioritizes improved communication with borrowers regarding changes in loan schedules and EMI adjustments.
Differentiating between floating and fixed interest rate loans, the floating rate is variable and changes according to market conditions. It’s linked to the base rate offered by lenders, adjusting automatically with changes in the base rate. In contrast, fixed home loan interest rates require fixed and equal repayments over the loan tenure, unaffected by market fluctuations.