RBI Implement Transparent Guidelines for Resetting Floating-Interest Rates on Loans
MAS Team | 18 August 2023
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The Reserve Bank of India (RBI) has taken a significant step towards enhancing borrower transparency and empowerment in the lending landscape. On August 18, 2023, the RBI issued comprehensive guidelines outlining the procedure to reset floating-interest rates on Equated Monthly Instalments (EMI)-based personal loans. This move comes in response to the need for clear communication between lenders and borrowers about the potential impact of changes in benchmark interest rates on loan terms, including EMI adjustments and tenure modifications.
 
As part of the new guidelines, all registered entities (REs) are mandated to proactively communicate with borrowers regarding any alterations in EMI and/or tenure resulting from fluctuations in the benchmark interest rate. In case such changes lead to an increase in EMI or tenure, borrowers are to be promptly informed through appropriate channels, as emphasized by the RBI.
 
This development holds implications for all borrowers with floating-rate personal loans, encompassing home loans and auto loans. The RBI's proactive approach underscores its commitment to fostering transparency and awareness within the borrowing ecosystem.
 
The introduction of these guidelines comes shortly after the RBI's announcement in its August policy regarding the establishment of a transparent framework for the resetting of interest rates on floating-rate loans. Governor Shaktikanta Das highlighted the central bank's plans to introduce a mechanism that enables borrowers to transition from floating to fixed interest rates.
 
Furthermore, the RBI's guidelines underscore the importance of transparency in loan processes. They require REs to ensure full disclosure of any charges associated with transitioning from floating to fixed rates, as well as other service charges or administrative costs linked to this process. The RBI also stresses the need for REs to offer borrowers the choice to opt for fixed rates as per their board-approved policy.
 
Additionally, REs are instructed to provide borrowers with the flexibility to choose between options like enhancing the EMI or extending the tenor, or a combination of both. Borrowers can also choose to make partial or full prepayments during the loan tenure. The RBI emphasizes that foreclosure charges or pre-payment penalties should adhere to existing instructions.
 
Importantly, the RBI also emphasizes that elongating the tenor for a floating-rate loan should not result in negative amortization; ensuring borrowers financial health is not compromised.
 
Moreover, REs are expected to provide borrowers with periodic statements that are easy to comprehend. These statements, to be shared quarterly, should outline principal and interest recovered to date, EMI amount, remaining EMIs, and the annualized rate of interest or Annual Percentage Rate (APR) for the entire loan tenor.
 
The RBI has set a deadline for REs to extend these instructions to both existing and new loans, ensuring that borrowers are well-informed by December 31, 2023. This move is poised to provide considerable relief to individuals with personal loans who have been grappling with the unpredictability of floating interest rates.
 
In conclusion, the RBI's comprehensive guidelines for resetting floating-interest rates demonstrate its dedication to promoting transparency and empowering borrowers with relevant information. By enhancing communication and offering borrowers a clear understanding of their loan terms, the RBI aims to create a more informed and responsible lending landscape.