Page 48 - Banking Finance September 2023

FEATURES

RBI allows switch from floating to fixed

rate regime: What do new personal

loan guidelines say?

he Reserve Bank of India (RBI) asked all regulated Freedom Sale
T entities (REs), including banks and NBFCs, to give ELONGATION: The borrowers will also be given the choice

personal loan borrowers an option to switch
over from a floating rate to a fixed rate regime to opt for enhancement in EMI or elongation of tenor or
for a combination of both options, and to prepay, either in
at the time of resetting interest rates. In a circular on ‘Reset
part or in full, at any point during the tenor of the loan, with
of floating interest rate on equated monthly instalments
foreclosure charges.
(EMI) based personal loans’, the central bank said the
borrowers will also be given the choice to opt for
REs should ensure that the elongation of tenor in case of a
enhancement in EMI or elongation of the tenor.
floating rate loan does not result in negative amortisation.
REs will have to share or make accessible to the borrowers,
What are the new changes? through appropriate channels, a statement at the end of

The RBI asked banks to implement the following each quarter which will enumerate the principal and interest
regulations: recovered till date, EMI amount, the number of EMIs left
and annualized rate of interest.
At the time of sanction, REs will have to clearly
communicate to the borrowers about the possible impact The RBI said REs will have to ensure that these instructions
of a change in benchmark interest rate on the loan leading are extended to the existing as well as new loans by
to changes in EMI and/or tenor or both. Any increase in the December 31, 2023.
EMI/ tenor or both will have to be communicated to the
borrower immediately through appropriate channels. Why has RBI issued new regulations?

The supervisory reviews undertaken by the RBI and the
SWITCHOVER: At the time of reset of interest rates, REs
feedback and references from members of the public have
will have to give the option to borrowers to switch over to
revealed several instances of unreasonable elongation of
a fixed rate as per their board-approved policy. The policy
tenor of floating rate loans by lenders without proper
will also specify the number of times a borrower will be
consent and communication to the borrowers.
allowed to switch during the tenor of the loan.
Banks can change the interest rate by changing the
REs will have to disclose all applicable charges for
internal benchmark rate and the spread during the term of
switching loans from floating to fixed rate and any other
the loan which could harm the interest of the borrower and
service charges/ administrative costs in the sanction letter
also impair monetary transmission. Borrowers have
and also at the time of revision of charges or costs from time
complained that banks normally change or reset the EMIs
to time.
48 | 2023 | SEPTEMBER | BANKING FINANCE