MUMBAI: The Reserve Bank of India (RBI) on Friday asked banks and other lenders to provide individual borrowers with an option of switching over to a fixed rate at the time of reset of interest rates. RBI released detailed guidelines to reset interest rates for equated monthly installments (EMI) in floating interest loans.
The guidelines come after several borrowers raised concerns about the elongation of loan tenor or increase in EMI amount, without proper communication. The central bank, on August 8, in its monetary policy review said it would shortly issue the guidelines regarding this issue. “At the time of sanction, REs (Regulated Entities) shall clearly communicate to the borrowers about the possible impact of change in the benchmark interest rate on the loan leading to changes in EMI and/or tenor or both. Subsequently, any increase in the EMI/ tenor or both on account of the above shall be communicated to the borrower immediately through appropriate channels,” the RBI said in a notification.
It further said at the time of reset of interest rates, REs should provide an option to borrowers to switch over to a fixed rate as per their board-approved policy. The policy, RBI added should specify the number of times a borrower will be allowed to switch during the tenor of the loan. Borrowers should also be given a choice to opt for enhancement in EMI or elongation of tenor or a combination of both options.
In a separate notification, RBI also released guidelines to stop the practice of banks and NBFCs of using penal interest as a revenue enhancement tool. As per the revised norms, lenders would be able to levy only “reasonable” penal charges in case of default in repayment of loans.
Banks and other lending institutions will not be allowed to levy penal interest with effect from January 1, 2024, the RBI said in its notification on ‘Fair Lending Practice-Penal Charges in Loan Accounts’.
“Penalty, if charged, for non-compliance of material terms and conditions of loan contract by the borrower shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances,” RBI said in a notification.