Loan EMIs: The Reserve Bank of India (RBI) on Friday asked banks and other lenders to provide individual borrowers with an option of switching over to a fixed rate at the time of reset of interest rates.
In a fixed interest rate regime, the interest rate on a loan remains the same throughout the tenure, thus keeping EMI the same. However, under the floating interest rate system, interest rates on loans keep changing based on the RBI’s repo rate revisions throughout the tenure, which changes EMIs.
In a notification, it 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, 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,” 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.
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