RBI asks banks to provide borrowers option to switch from floating to fixed interest rate

The Reserve Bank of India (RBI) on Friday advised banks to provide borrowers the option to switch from floating to fixed interest rates. 

Banks and other lenders will have to implement personal loan instructions by December 31, 2023, said the banking regulator. "Regulated entities shall ensure that the 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," said RBI in a statement.

According to RBI personal loans refers to loans given to individuals and consist of (a) consumer credit, (b) education loan, (c) loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), and (d) loans given for investment in financial assets (shares, debentures, etc.).

At the time of sanction of EMI-based floating rate personal loans, regulated entities (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, said RBI in a statement.

''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,'' 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.

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.