Norms on Reset of floating Rate of interest on EMI based loans

RBI has provided instructions for the reset of the floating interest rate on equated monthly installments (EMI) vide circular bearing reference number DOR.MCS.REC.32/01.01.003/2023-24 dated August 18, 2023.

According to these guidelines, Regulated Entities (REs) are permitted to offer various types of loans with either fixed or variable interest rates. However, when granting Equated Monthly Installment (EMI)-based floating rate personal loans, REs must evaluate the borrowers’ repayment capacity, guaranteeing that there is adequate flexibility to extend the loan term or increase the EMI amount if the external benchmark rate increases during the loan’s duration. There have been multiple instances where consumers have expressed dissatisfaction with the extension of loan tenure and/or increase in equated monthly installments (EMI) without appropriate communication and/or consent from the borrowers. These complaints have been raised as a result of the rise in interest rates.

To address these concerns, Regulated Entities like Banks including cooperative banks, NBFCs, and other financial institutions  are advised to put in place an appropriate policy framework meeting the following requirements for implementation and compliance:

• While sanctioning loans, REs shall communicate to the borrowers about the possible impact of a 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.

• While resetting interest rates, REs 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 tenure of the loan.

• The borrowers shall also be given the choice to opt for (i) enhancement in EMI or elongation of tenor or for a combination of both options; and, (ii) to prepay, either in part or in full, at any point during the tenor of the loan. Levy of foreclosure charges/ pre-payment penalty shall be subject to extant instructions.

• All applicable charges for switching 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 REs from time to time. It is the responsibility of the financial institutions to ensure that the elongation of tenor in case of a floating rate loan does not result in negative amortisation.

• REs shall share/make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which shall at the minimum, enumerate the principal and interest recovered to date, EMI amount, number of EMIs left, and annualized rate of interest / Annual Percentage Rate (APR) for the entire tenor of the loan. The REs shall ensure that the statements are simple and easily understood by the borrower.

“Apart from the equated monthly installment loans, these instructions would also apply, mutatis mutandis, to all equated installment-based loans of different periodicities. In case of loans linked to an external benchmark under the External Benchmark Lending Rate (EBLR) regime, the banks should follow extant instructions and also put in place adequate information systems to monitor the transmission of changes in the benchmark rate to the lending rate”, said RBI.

“REs shall ensure that the above 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” the circular stated.

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