The Reserve Bank of India (RBI) recently issued a circular addressing the reset of floating interest rates on equated monthly installment (EMI)-based personal loans. This move aims to enhance transparency, borrower empowerment, and operational clarity for lending institutions.
Applicability of the Circular
The circular exclusively applies to EMI-based personal loans. It does not extend to other loan types, such as business or commercial loans. Personal loans, as defined in the RBI’s earlier circular dated January 4, 2018, fall within its purview.
Communication Obligations for Lending Institutions
Regulated Entities (REs) must proactively communicate with borrowers to ensure they understand how interest rate resets impact their EMIs.
At the Time of Sanction: Borrowers must receive a detailed disclosure of the Annual Percentage Rate (APR) in the Key Fact Statement (KFS) and loan agreement. The RE should explain how changes in the benchmark interest rate could influence the loan over its tenure.
During Loan Tenure: Borrowers must be informed of any increase in EMI or loan tenor due to interest rate changes. Quarterly statements must disclose the principal and interest paid, remaining EMI count, and the annualized interest rate.
Options for Borrowers During Interest Rate Resets
In a rising interest rate scenario, borrowers are entitled to flexibility. REs must offer:
- EMI or Tenor Adjustment: Borrowers can choose to increase the EMI or extend the loan tenor—or a combination of both.
- Switch to Fixed Interest Rate: Borrowers can convert their floating rate loan to a fixed interest rate loan for the remaining tenure.
- Prepayment Options: Borrowers may prepay the loan partially or fully at any time without restrictions.
Mandatory Fixed Interest Rate Option
REs are required to offer fixed interest rate loans in all personal loan categories. Even if they currently lack such products, they must introduce fixed interest rate options as per their Board-approved policies.
Flexibility to Switch Loan Types
Borrowers may switch between floating and fixed interest rate loans multiple times during the loan tenure. However, the frequency of such switches will be governed by the RE’s Board-approved policy.
Coverage of Benchmark Types
The circular applies to personal loans linked to both external benchmarks (like the repo rate) and internal benchmarks (such as the Base Rate, MCLR, or BPLR).
Charges for Switching Loan Types
REs can levy charges for switching between floating and fixed interest rates or vice versa. These charges, approved by the RE’s Board, must be transparently disclosed in the sanction letter and updated on the institution’s website.
Housing Loans by Urban Cooperative Banks (UCBs)
For UCBs offering housing loans with a maximum tenure of 20 years, the circular’s options, such as extending the loan tenor, are permitted within the regulatory framework outlined in the Master Circular on Housing Finance.
Applicability to Existing Borrowers
The circular’s provisions apply to both new and existing borrowers. This ensures consistency in borrower treatment and operational processes.
Conclusion
The RBI’s circular empowers borrowers with greater transparency and flexibility in managing their personal loans. It also ensures that lending institutions adopt borrower-friendly practices, aligning with regulatory mandates. Borrowers should stay informed of their rights and options, and REs must maintain transparent communication to foster trust and compliance.
