Banks must allow retail borrowers to switch between fixed and floating rates: RBI

Mumbai (Maharashtra) [India], August 18 (ANI): Reserve Bank of India on Friday said regulated entities (REs) have the freedom and they must offer all categories of retail loans either on a fixed or floating interest rates basis.

At the time of sanction of EMI-based floating rate personal loans, RBI said regulated entities are required to take into account the repayment capacity of borrowers to ensure that adequate headroom or margin is available for elongation of tenor and or increase in EMI, in the scenario of a possible increase in the external benchmark rate during the tenor of the loan.

In the wake of rising interest rates, RBI said it had received several grievances from consumers related to the elongation of loan tenor and or increase in EMI amount, without proper communication with and or consent of the borrowers.

“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,” RBI said.

As a part of the new rules, the central bank said:

At the time of sanction, regulated entities 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 or 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, regulated entities shall 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 enhancement in EMI or elongation of tenor or for a combination of both options; and, to prepay, either in part or in full, at any point during the tenor of the loan.

All applicable charges for switching of loans from floating to fixed rate and any other service charges/ administrative costs incidental to the exercise of the above options shall be transparently disclosed in the sanction letter and also at the time of revision of such charges/ costs by the regulated entities from time to time.

REs shall ensure that the elongation of tenor in case of floating rate loan does not result in negative amortisation.

RBI said regulated entities shall ensure that these instructions are extended to the existing as well as new loans suitably by December 31, 2023.

All existing borrowers shall be sent a communication, through appropriate channels, intimating the options available to them, RBI said.