New Delhi: In a move to enhance transparency and protect borrowers’ interests, the Reserve Bank of India (RBI) has issued a circular pertaining to the reset of floating interest rates for Equated Monthly Instalments (EMI) based personal loans.
These guidelines are applicable to all regulated entities including scheduled commercial banks (SCBs), Non-Banking Financial Company (NBFCs), and Housing Finance Company (HFCs). They need to strictly implement the guidelines by December 31, 2023 and have to send the inform all existing customers about the guidelines, informing about the options available to them.
The circular highlights the freedom of REs to provide advances with fixed or floating interest rates.
Floating interest EMIs (Equated Monthly Installments) refer to the monthly payments made by borrowers for loans with a floating interest rate. In loans with floating interest rates, the interest rate is not fixed and can change periodically based on certain predetermined factors, such as changes in an external benchmark rate.
When sanctioning EMI-based floating rate personal loans, REs are required to inform borrowers about the potential effects of changes in benchmark interest rates on the loan’s EMI and/or tenor. Any subsequent increase in EMI or tenor due to changes in benchmark rates should be promptly communicated to borrowers.
Borrowers should be given the option to switch to a fixed interest rate as per the REs’ board-approved policy. The policy should specify the number of times a borrower can switch during the loan’s tenor.
Borrowers should have the choice to opt for enhancements in EMI, elongation of tenor, or a combination of both. They should also be able to prepay partially or in full during the loan’s tenor, subject to applicable charges as per extant instructions.
All charges related to switching from floating to fixed rate and other service/administrative costs linked to these options should be transparently disclosed in the sanction letter and during revisions.
REs must ensure that elongating the tenor of a floating rate loan does not result in negative amortization.
Borrowers should receive quarterly statements detailing principal and interest recovered, EMI amount, remaining EMIs, and annualized rate of interest for the loan’s entire tenor.