The Reserve Bank of India (RBI) directive aims to empower borrowers by ensuring transparency in loan terms, payment flexibility, and a choice to opt for fixed rates.
To empower borrowers, the Reserve Bank of India (RBI), on August 18, 2023, asked banks, non-banking financial companies (NBFCs), and cooperative banks to ensure transparency in loan terms and offer borrowers the option to shift to fixed interest rates. The directive primarily focuses on personal loan EMIs based on floating rates to address borrowers' concerns regarding unexpected extension of loan tenors due to increased interest rates.
RBI said that when sanctioning personal loan EMIs based on floating rates, all regulated entities, including banks, NBFCs and cooperative banks, must consider borrowers' repayment capacity. This will ensure sufficient room for potential changes in loan tenor or EMI amounts should the external benchmark rate increase during the loan tenure, the RBI release said.
The guidelines extend to new and existing loans. Regulated entities (REs) have until December 31, 2023, to apply these instructions, ensuring all borrowers benefit from these changes. They must also inform the borrowers about the changes through appropriate communication channels.
What The RBI Guidelines Mean
RBI emphasises that borrowers' consent for any changes in loan EMIs is paramount. Regulated entities must communicate clearly, both at the time of sanctioning the loan and the subsequent interest rate reset, due to the benchmark rate fluctuations that impact loan terms. This includes changes in equated monthly instalments (EMI) or tenor. Any alterations to the EMI or tenor due to rate changes must be promptly communicated to borrowers.
At the time of interest rate reset, borrowers can choose to switch to a fixed rate as per the regulated entity's board-approved policy. Additionally, borrowers can opt to enhance their EMIs, extend the tenor, or combine both. The sanction letter must disclose any administrative cost for choosing this option.
Another key provision is the right to prepay partially or fully during the loan tenure. While regulated entities may levy charges for such prepayment, they must adhere to existing rules.
REs shall ensure that the extension of loan tenor in the case of floating rates does not result in negative amortisation, RBI said. Negative amortisation happens when a borrower's payments don't cover the interest, causing their due amount to rise even when they pay.
Banks, NBFCs and cooperative banks are also mandated to provide quarterly statements to borrowers. These statements should offer a clear breakdown of the principal and interest recovered, remaining EMIs, and the annualised rate of interest or Annual Percentage Rate (APR) for the loan's entire duration.