Mumbai: The Reserve Bank of India (RBI) on Friday asked lenders to provide options to floating rate loan borrowers to either increase Equated Monthly Instalment (EMIs) or tenure or prepay the full amount or a part of it at any point during the tenure or move to fixed-rate interest rate at the time of resetting the loan.
The RBI said that 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 the borrowers have been received. The central bank said that at the time of sanction of EMI based floating rate personal loans, regulated entities are required to take into account the repayment capacity of borrowers to ensure that adequate headroom/ margin is available for elongation of tenor and/ or increase in EMI, in the scenario of possible increase in the external benchmark rate during the tenor of the loan.
According to the notification on ‘Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans’, at the time of sanction, lenders should 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. Subsequently, any increase in the EMI/ tenor or both on account of the above shall be communicated to the borrower immediately through appropriate channels.
At the time of reset of interest rates, lenders will have to 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 tenor 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/ prepayment penalty shall be subject to extant instructions." The banks or NBFCs
must ensure that an increase in loan tenure does not result in negative amortisation, the central bank said.
Explains Vipul Patel, founder MortgageWorld said, “The RBI has now made it mandatory that at the time of sanctioning a loan, the bank will have to convey in writing to the borrower the impact of a rate
change. Lenders henceforth cannot take decisions unilaterally. So, whenever the repo rate is hiked by the RBI, the lender will have to provide an option to the borrower if he wants to increase the EMI or
the tenor. Similarly when the RBI cuts rates, banks will have to ask the borrower if he wants a lower EMI or a reduced tenure.”
Lenders also have to make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which shall at the minimum, enumerate the principal and interest recovered
till date, EMI amount, number of EMIs left and annualized rate of interest / Annual Percentage Rate (APR) for the entire tenor of the loan.
Banks and NBFCs get time till December 31, 2023, to extend these options to existing and new loan borrowers.
The new norms on personal loans would apply to consumer credit, education loans, loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), and loans given for investment in
financial assets (shares, debentures, etc.).
