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RBI changes norms for floating interest rate on EMI based personal loans

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The Reserve Bank of India (RBI) of India has allowed banks, NBFCs and HFCs to offer loans on fixed or on floating interest rate basis. However, recent fluctuations in lending rates and rising interest rates had led to grievances from borrowers related to elongation of loan tenor and/or increase in EMI amount, without proper communication with and/or consent of the borrowers. To address the same, Reserve Bank of India (RBI) has now advised lenders to put in place necessary framework to ensure greater transparency in case of revision of terms of the loans.

RBI has proposed that such a policy framework should ensure that at the time of sanction of the loan itself the lender should 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. Further, any increase in the EMI/ tenor or both on account of the same shall be communicated to the borrower immediately through appropriate channels. Moreover, at the time of such reset, the lender should provide the option to the borrowers to switch over to a fixed rate. The policy, inter alia, may also specify the number of times a borrower will be allowed to switch during the tenor of the loan. All applicable charges for switching of 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.

The proposed policy of the lenders should also offer the borrowers an option to 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. Moreover, such elongation of tenor in case of floating rate loan should not result in negative amortisation.

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

RBI has also clarified that these instructions shall be applicable to all equated installment based loans of different periodicities and shall bring effect to these directions by December 31, 2023.

A copy of the RBI instructions is enclosed for the reference of the readers.

Readers can also share their views with Regstreet Law Advisors at info@regstreetlaw.com.

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