RBI Tells Banks To Provide Loan Borrowers Option To Switch To Fixed Interest Rates

Regulated Entities (REs) should provide an option to borrowers to switch over to a fixed rate as per their board-approved policy

The Reserve Bank of India on Friday asked banks and other lenders to provide individual borrowers an option of switching over to a fixed rate at the time of reset of interest rates. The central bank in a notification said in respect of EMI-based floating rate personal loans, 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 borrowers have been received. In order to address these concerns, the RBI asked entities regulated by it to put in place an appropriate policy framework.

"At the time of sanction, REs shall 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," the RBI said.

It further said that at the time of reset of interest rates, Regulated Entities (REs) should provide an option to borrowers to switch over to a fixed rate as per their board-approved policy. The policy, RBI added should specify the number of times a borrower will be allowed to switch during the tenor of the loan.

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. However, in respect of EMI based floating rate personal loans, 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. In order to address these concerns, the REs are advised to put in place an appropriate policy framework meeting the following requirements for implementation and compliance.

The central bank said that the borrowers should also be given a choice to opt for enhancement in EMI or elongation of tenor or for a combination of both options. They should also be given an option to prepay, either in part or in full, at any point during the tenor of the loan.