RBI issues detailed guidelines to reset floating rate loan EMI

Reserve Bank of India

The Reserve Bank of India (RBI) on August 18 issued detailed guidelines to reset interest rates for equated monthly installments (EMI) in floating interest loans.

These guidelines advised all registered entities (RE) to clearly communicate to the borrowers about the possible impact of change in the benchmark interest rate on the loan, leading to changes in the EMI and/or 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.

On August 8, the central bank in its monetary policy review said it will shortly issue the guidelines for this.

The central bank said all REs shall ensure that the above instructions are extended to the existing as well as new loans suitably 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 a guidelines.

"Levy of foreclosure charges/ pre-payment penalty shall be subject to extant instructions," RBI said in a release.

The RE should also disclosed all the applicable charges for switching of loans from floating to fixed rate and any other service charges/ administrative costs.

Additionally, at the end of the quarter,  all REs should share or make available a statement which must have details of the recovered principal and interest till date, number of EMIs left and annualized rate of interest / Annual Percentage Rate (APR) for the entire tenor of the loan.

The central bank advised all RE's to to keep the statement simple and which can be easily understood by the borrower.