REs must offer fixed-rate option for EMI personal loans: RBI FAQs

The Reserve Bank of India (RBI) has said regulated entities (REs) must offer fixed interest rate products in all equated installment-based personal loan categories. Issuing frequently asked questions (FAQs) on the 'Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans' today, the RBI said the REs must "provide the option to the borrowers to switch over to a fixed rate as per their board approved policy at the time of reset of interest rates".

REs have been advised to communicate to the borrowers the impact of interest rate reset on EMI, in floating rate personal loans, both at the time of sanction as well as during the tenure of the loan. The RBI says via FAQs that at the time of sanction, the annualised rate of interest or annual percentage rate (APR) should be disclosed in the key fact statement (KFS) and the loan agreement, apart from explaining the impact of change in the benchmark interest rate on the loan.

During the tenure of the loan, any increase in the EMI or tenor on account of the external benchmark rate should also be communicated. The entities must also provide quarterly statements, disclosing at the minimum, the principal and interest recovered to date, EMI amount, number of EMIs left and annualised rate of interest for the tenor of the loan.

The RBI has advised REs to intimate the different options available to address the increase in EMI in a rising interest rate scenario. Explaining these options, the RBI says whenever there is a reset of interest rates for an entire class of borrowers in a particular loan category, say home loan, due to an increase in the reference benchmark; they must provide options like either enhancement in EMI or elongation of number of EMIs, keeping the EMI unchanged or a combination of both. Customers can also switch to a fixed interest rate for the remaining portion of the loan and should have the option to prepay, either in part or in full, at any point during the residual tenor of the loan.

The RBI says once the customer has exercised an option to switch over from a floating interest rate loan to a fixed interest rate loan, then the REs are required to give the option to the borrower to again switch back to a floating rate loan. "The circular intends to allow flexibility to the customer to switch from floating rate loan to fixed rate loan or vice versa subject to applicable charges. The RE is required to specify the number of times a borrower will be allowed to exercise the switch option during the tenor of the loan under its Board approved policy."

On the levy of charges for switching of loan from a fixed interest rate to a floating interest rate, the RBI says REs can levy applicable charges but they must be disclosed transparently. The RBI's guidelines cover all equated instalment-based personal loans, irrespective of whether they are linked to an external benchmark or an internal benchmark.