RBI issues guidelines to recalibrate floating rate loan EMI

According to these guidelines, all registered entities (REs) are required to effectively communicate to borrowers the potential consequences of alterations in the benchmark interest rate on their loans.

This communication should encompass the resultant adjustments in both EMI amounts and the loan tenor.

“Any increase in the EMI/tenor or both on account of this shall be communicated to the borrower immediately through appropriate channels,” RBI said in a release.

During its monetary policy review on August 8, the central bank indicated its intention to release the guidelines for this matter soon.

The Reserve Bank of India (RBI) emphasized that all registered entities (REs) must ensure the implementation of the instructions for both existing and new loans by December 31, 2023.

"All existing borrowers shall be sent a communication, through appropriate channels, intimating the options available to them."

Further, the Central bank also asked banks to provide borrower an option to switch over to a fixed rate as per their Board approved policy, and also specify how many times a borrower is allowed to switch during the tenor of the loan.

They should also be given the choice to opt for enhancement in EMI or elongation of tenor or for a combination of both options; and to prepay, either in part or in full, at any point during the tenor of the loan, RBI said in the guidelines.

In line with these guidelines, borrowers should be provided with the option to choose an increase in their equated monthly installments (EMIs), an extension of the loan tenure, or a combination of both.

Moreover, borrowers should have the freedom to make partial or complete prepayments at any point during the loan tenure, as outlined in the RBI's guidelines.

The registered entities (REs) are required to provide complete transparency by disclosing all relevant charges associated with the loan switch from a floating to a fixed interest rate, as well as any other service charges or administrative costs.

In addition, the RBI has instructed all REs to furnish a statement at the conclusion of each quarter. This statement should encompass comprehensive details including the total recovered principal and interest up to the current date, the remaining number of EMIs, and the annualized rate of interest or Annual Percentage Rate (APR) for the entire loan tenure.

It is recommended that these statements be presented in a straightforward and easily comprehensible manner, ensuring that borrowers can readily understand the information provided by the registered entities.