The RBI in its notification released on August 18th has issued a directive to all Regulated Entities (REs) functioning in the Personal Loan domain to allow borrowers to choose between fixed or floating rate at each rate revision.
To bring about transparency in the system, the RBI has asked the lenders to communicate clearly to borrowers any increase in their loan tenure, or the EMI. The move is in response to several complaints from home loan borrowers wherein no consent was sought for the change in the loan tenure, or the change not communicated clearly.
The RBI has also asked the REs to take steps in order to ensure that any alteration in the loan tenure does not lead to negative amortisation in the case of a floating interest rate.
The regulator has also asked the lenders to transparently communicate the details, charges, and costs of switching from a floating interest rate to a fixed one both in the sanction letter, and whenever the aforementioned charges are amended by lenders.
Learn more about the details of the directive
The lenders must inform the borrower about the risks associated with a benchmark-linked interest rate and the possibility of an increase in the EMI or tenor with a change in the benchmark rate at the time of sanctioning the loan.
Subject to the decision of the Board of the lender, an option must be provided to borrowers to switch from a floating interest rate to a fixed one at each revision in the interest rate. The lenders could decide the number of times a borrower can switch within the tenure of the loan.
At the time of the revision of the interest rate, the borrower must be given the choice of opting for an increase in EMI, alteration in the tenure of the loan, or a combination of both.
The lenders must also share a statement with the borrower each quarter, containing information about the EMI amount, interest on the loan paid till then, the outstanding principal amount, the principal amount repaid, the remaining tenure, and so on.
The new guidelines must be followed for both new as well as existing personal loans and the mechanism for compliance must be put in place by the lenders by December 31st 2023.
