The Reserve Bank of India (RBI) has issued a new circular on FAQs on ‘Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans‘. It states that regulated entities, such as banks, must provide the home loan borrower with the option of switching to/from a fixed rate as per the board-approved policy at the time of interest rate reset. Note that this circular will be applicable to the existing borrowers as well. The FAQs are issued on January 10, 2025.
Lenders are required to offer fixed interest rate options for all personal loan categories such as home loan, car loan etc. and allow borrowers to switch between floating and fixed rates, with flexibility subject to board-approved policies and charges. This applies to loans linked to both external and internal benchmarks. Lenders may levy charges for switching rates, which must be transparently disclosed to the loan borrowers.
Missed the EMI of your loan by 1 day? It can cost you more than you think
This would mean that when the RBI hikes the repo rate, then the borrower can switch from floating to fixed interest rate to save on interest costs by paying certain charges. Similarly, when RBI cuts repo rate, then also borrower has option to switch from fixed to floating interest rate regime to save on interest costs.
However, the bank can 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, as per the RBI circular.
As per the circular, lenders must communicate the impact of interest rate resets on EMIs for floating-rate personal loans at the time of sanction and during the loan tenure. At sanction, lenders must disclose the annualized rate of interest in the Key Fact Statement (KFS), outline the potential impact of rate changes, and provide regular updates on EMI changes and loan details during the tenure. Borrowers must also be informed of options to address rising interest rates, such as adjusting EMIs, extending the loan tenure, switching to a fixed rate, or prepaying the loan.Will there be charges when you switch interest rate regime?
Yes, banks can levy applicable charges for switching of loans from floating to fixed rate or vice versa and/ or any other service charges/ administrative costs incidental to the exercise of the switchover.
What is a personal loan as per RBI?
According to RBI circular dated January 4, 2018, “Personal loans refers to loans given to individuals and consist of (a) consumer credit, (b) education loan, (c) loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), and (d) loans given for investment in financial assets (shares, debentures, etc.).”
The FAQs issued by RBI on personal loans covers all the loans mentioned above.
What is floating interest rate home loan?
A floating interest rate is an interest rate that fluctuates over time, due to changes in the benchmark rate. The Reserve Bank of India (RBI) sets the repo rate, which is usually a benchmark rate that influences floating interest rates on home loan. RBI, in its floating rate regime, has allowed banks to offer other benchmarks such as T-bills for linking home loan interest rate.
Here are important FAQs on ‘Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans’
REs have been advised to intimate the different options available to address the increase in EMI in a rising interest rate scenario. What are the different options available to borrowers during a rising interest rate cycle in respect of equated installment based personal loans?
Ans: Whenever there is a reset of interest rates for an entire class of borrowers in a particular loan category, say home loan, due to increase in the reference benchmark; the RE shall provide the following options to the borrowers:
Either enhancement in EMI or elongation of number of EMIs, keeping the EMI unchanged or a combination of both options;
Switch to fixed interest rate for the remaining portion of the loan; and
To prepay, either in part or in full, at any point during the residual tenor of the loan.
One of the options allowed to the borrower vide paragraph 2(ii) of the circular is the option to switch from a floating interest rate loan to a fixed interest rate as per their Board approved policy. If the REs presently do not have any fixed interest rate product in any loan category, say home loan, then is it mandatory for the RE to introduce such a product?
Ans: Yes, REs have to mandatorily offer fixed interest rate product in all equated installment based personal loan categories. As stated in paragraph 2 (ii) of the circular, REs shall 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.
Whether the circular intends to cover only those loans which are linked to External Benchmark or the loans linked to Internal Benchmarks (Base Rate/MCLR/BPLR) also?
Ans: It is clarified that the circular covers all equated installment based personal loans, irrespective of whether they are linked to an external benchmark or an internal benchmark.
Whether the instructions in the circular allow REs to levy applicable charges for switching of loan from fixed interest rate to floating interest rate and vice versa?
Ans: Yes, as stated in paragraph 2 (iv) of the circular, RE can levy applicable charges for switching of loans from floating to fixed rate or vice versa and/ or any other service charges/ administrative costs incidental to the exercise of the switchover options and the same shall be transparently disclosed in the sanction letter and also, at the time of revision of such charges/ costs by the RE.
