RBI boosts transparency in EMI reset, loan borrowers can switch to fixed-rate regime

Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday said that it would bring in greater transparency in resetting of the interest rate on equated monthly instalments (EMI) for floating interest loans. 
A floating interest rate is the rate that varies or changes along with the changing market conditions as opposed to a fixed interest rate which remains the same for the entire tenure of the loan.

The RBI said the new framework will allow borrowers to switch to fixed interest rate from floating interest rates. This would provide relief to borrowers of home, auto and other loans reeling under the impact of high interest rate.

Announcing the decisions of the MPC, Das said: “It is proposed to put in place a transparent framework for reset of interest rates on floating interest loans.

Governor Das said under the framework, to be put in place shortly, the lenders will have to clearly communicate with the borrowers about tenor and EMI.

"The framework will require Regulated Entities to (i) clearly communicate with borrowers for resetting the tenor and/or EMI; (ii) provide options for switching to fixed-rate loans or foreclosure of loans; (iii) disclose various charges incidental to the exercise of the options; and (iv) ensure proper communication of key information to borrowers."

These measures will further strengthen consumer protection, he added.

"The supervisory reviews undertaken by the Reserve Bank and the feedback and references from members of public have revealed several instances of unreasonable elongation of tenor of floating rate loans by lenders without proper consent and communication to the borrowers," Das added.

Later at the press conference after the monetary policy committee (MPC) meeting, Das said: “Individual banks will assess the payment capacity and age factor of the borrowers. The framework in place is to provide a wider picture and to avoid unduly long elongation.”

He said with the introduction of a framework, the central bank will have a wider picture for institutions.

Since October 2019, the RBI rules noted that all floating rate-based loans are required to be linked to an external benchmark. Initially, when the external benchmark system was introduced, the RBI allowed banks to reset the EMI once three months.

At present, loan seekers can switch from floating and fixed interest rates and vice versa but have to pay a nominal conversion fee. The fee varies between 0.50 per cent to 2 per cent of the total home loan amount.

Loan seekers prefer fixed home loan interest rates as the floating interest rates are volatile and fluctuate depending on the market scenario. 

The floating rates depend on the base rate of the banks. So, whenever the base rate changes, the interest rate gets automatically revised. Therefore, whenever RBI makes changes to its repo rate and the same is passed on to the borrowers.

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