Attention borrowers! RBI's FAQ clarifies banks must offer fixed interest rate for all personal loans with EMIs

The Reserve Bank of India (RBI) on January 10 said it is mandatory for banks to offer fixed interest rate product in all equated installment based personal loan categories.

The frequently asked questions (FAQs) on 'Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans' (August 2023) also said the circular covers all equated installment based personal loans, irrespective of whether the interest rate is linked to an external benchmark or an internal benchmark.

What Did The FAQ Say?

• At the time of sanction of loans, annualised rate of interest/ annual percentage rate (APR), as applicable, should be disclosed in the Key Fact Statement (KFS) and the loan agreement, the FAQs said when and at what frequency should banks and other regulated entities (REs) communicate with the borrower.
• During the tenure of the loan, any increase in the EMI/tenor on account of the external benchmark rate should be communicated.
• The quarterly statements should be provided disclosing at the minimum, the principal and interest recovered till date, EMI amount, number of EMIs left and annualised rate of interest for the tenor of the loan.
• Regulated entities (REs), the FAQs said have to mandatorily offer fixed interest rate product in all equated installment based personal loan categories.
• REs have to 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.

Background of Bank Loans Interest Rates Increase

In August 2023, the RBI directed banks to allow individual borrowers paying loans through EMIs to opt for a fixed interest rate system or extension of loan tenor, a move aimed at preventing loanees from falling into the trap of negative amortisation, in wake of rising interest rate.

The interest rates have moved northward since May 2022 after the central bank started raising the benchmark lending rate (repo) in a bid to check inflation following the outbreak of the Russia-Ukraine war.

As a result of a 250 basis points increase in the repo rate, a large number of borrowers faced negative amortisation, wherein the EMI works out to be less than the interest obligation, resulting in a persistent increase of the principal amount.

Disclaimer: This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.