The Reserve Bank of India has instructed banks and other lending institutions to offer individual borrowers the opportunity to switch to a fixed interest rate during the interest rate reset period. In a notification issued on Friday, the central bank addressed the concerns arising from increasing interest rates, which led to customer complaints about longer loan durations and higher Equated Monthly Installment (EMI) amounts without proper communication or consent from borrowers.
To address these issues, the RBI has mandated that entities under its regulation establish a transparent policy framework. This framework includes clear communication with borrowers about the potential impacts of changes in benchmark interest rates on loans, which could result in changes to EMIs and/or loan tenors. In the event of such changes, borrowers must be promptly informed through appropriate channels.
During the interest rate reset, Regulated Entities (REs) are expected to provide borrowers with the option to transition to a fixed interest rate, in line with their board-approved policies. The RBI also stated that the policy must outline the permissible frequency of switches during the loan tenure.
To ensure that borrowers’ repayment capacities are considered, REs must assess the availability of headroom or margin to accommodate potential tenor extensions and/or EMI increases due to hikes in external benchmark rates. However, recognizing that customer complaints related to inadequate communication and consent have emerged, particularly in relation to EMI-based floating rate personal loans, the RBI has called for the implementation of an appropriate policy framework to address these concerns.
The RBI has specified particular requirements for the implementation and adherence of this framework. Borrowers must be given the freedom to choose between enhancing EMIs, extending tenors, or a combination of both options. Additionally, borrowers should have the flexibility to make partial or full prepayments at any point during the loan tenure.
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