Loan Resetting: RBI allows these floating rate loan borrowers to change EMIs and loan tenures

The Reserve Bank of India (RBI) on Friday issued new guidelines to reset the floating interest rates on EMI-based personal loans. It h­­­as asked all regulated entities to implement certain regulations including giving an option to personal loan borrowers to switch from floating to fixed-rate loans during the period of resetting interest rates.  

In the RBI circular, dated August 18, 2023, the central bank stated that “At the time of sanction of EMI based floating rate personal loans, REs 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”.

Why the new guidelines?

The RBI said that it has received several consumer grievances related to the elongation of loan tenor and/or increase in EMI (Equated Monthly Instalments) without either the consent of the borrower or proper communication. To address this issue, the central bank has directed regulated entities to follow certain guidelines.

What are the guidelines?

The regulated entities, at the time of sanction a loan, are required to clearly communicate to the borrowers about the possible impact of a change in benchmark interest rate on the loan. Such impact includes changes in EMI or the tenor of the loan or both. The RBI said that REs must apprise the borrowers of any increase in the EMI or tenor immediately through appropriate channels.

During the time of resetting of interest rates, the REs must provide the borrowers with an option to switch over to a fixed-rate loan as per their policy. The policy must also state the number of times the borrower will be allowed to make such switch during the tenor of the loan.

The RBI guidelines also state that the borrowers must 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”.

The REs must clearly state all applicable charges involved in switching from floating to fixed rate in the sanction letter and also highlight it during the time of the revision of such charges or costs from time to time.

The circular also said that “REs shall ensure that the elongation of tenor in case of floating rate loan does not result in negative amortisation”.

The RBI has also directed REs to share a statement with borrowers at the end of each quarter which should mention the principal and interest recovered till date, EMI amount, and number of EMIs left and the annualised rate of interest for the entire tenor of the loan. The REs must also ensure that the statements are simple and easy to understand for the borrower.