We are writing to bring to your attention the recent update from the Reserve Bank of India (RBI) regarding the reset of floating interest rates on Equated Monthly Installments (EMI) based personal loans. This directive, outlined in RBI Circular no. RBI/2023-24/55 dated August 18, 2023, pertains to all Scheduled Commercial Banks, Regional Rural Banks, Primary (Urban) Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks, and Non-Banking Financial Companies (including Housing Finance Companies).
In light of the guidelines mentioned in the circular, we would like to highlight the following key points for your reference:
1. Communication of Impact: At the time of sanctioning EMI-based floating rate personal loans, it is imperative to clearly communicate to borrowers the possible impact of changes in benchmark interest rates on their loan. Any subsequent increase in the EMI, tenor, or both due to changes in the benchmark rate must be communicated promptly and effectively to the borrower through appropriate channels.
2. Option for Fixed Rate: Borrowers should be provided with the option to switch to a fixed interest rate in accordance with your organization’s approved policy. This policy should also define the number of times a borrower can avail of this option during the loan tenure.
3. Flexibility for Borrowers: Borrowers should be empowered to choose between enhancing their EMI, elongating the tenor, or selecting a combination of these options. Additionally, borrowers should be allowed to prepay either partially or in full during the loan tenure, subject to the existing prepayment guidelines.
4. Transparent Disclosure: All charges associated with switching from floating to fixed rates, along with any other service charges or administrative costs relevant to the aforementioned options, should be transparently disclosed both in the sanction letter and whenever these charges are revised.
5. Negative Amortisation Prevention: Measures should be taken to ensure that elongation of tenor for floating rate loans does not lead to negative amortization.
6. Quarterly Statements: Borrowers should receive statements at the end of each quarter, detailing the principal and interest recovered to date, the EMI amount, the number of remaining EMIs, and the annualized rate of interest/Annual Percentage Rate (APR) for the entire loan tenure. These statements should be designed to be easily comprehensible by borrowers.
7. Application to Different Loan Types: These instructions apply to all equated installment-based loans of varying periodicities. For loans linked to an external benchmark under the External Benchmark Lending Rate (EBLR) regime, the existing instructions should be followed, and effective information systems should be established to monitor the transmission of changes in benchmark rates to lending rates.
8. Implementation Deadline: These instructions must be extended to both existing and new loans by December 31, 2023. Existing borrowers should receive communication via appropriate channels, outlining the available options to them.
We kindly request you to review these guidelines thoroughly and ensure that your organization complies with the necessary changes within the stipulated timeline. These directives are issued under the relevant sections of the Banking Regulation Act, the Reserve Bank of India Act, and the National Housing Bank Act.
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Reserve Bank of India
RBI/2023-24/55
DOR.MCS.REC.32/01.01.003/2023-24
August 18, 2023
All Scheduled Commercial Banks
Regional Rural Banks
Primary (Urban) Co-operative Banks
State Co-operative Banks and District Central Co-operative Banks
Non-Banking Financial Companies (including Housing Finance Companies)
Madam / Dear Sir,
Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans1
Please refer to our circular no. DBR.No.Dir.BC.10/13.03.00/2015-16 dated July 01, 2015, Master Directions no. DNBR.PD.007/03.10.119/2016-17 dated September 01, 2016, DNBR.PD.008/03.10.119/2016-17 dated September 01, 2016 and DOR.FIN.HFC.CC.No.120/03.10.136/2020-21 dated February 17, 2021 vide which the guidelines pertaining to Fair Practices Code for lenders have been issued to SCBs, NBFCs and HFCs, respectively. In terms of extant instructions of Reserve Bank of India, regulated entities (REs) have the freedom to offer all categories of advances either on fixed or on floating interest rates basis.
2. At the time of sanction of EMI based floating rate personal loans, REs are required to take into account the repayment capacity of borrowers to ensure that adequate headroom/ margin is available for elongation of tenor and/ or increase in EMI, in the scenario of possible increase in the external benchmark rate during the tenor of the loan. However, in respect of EMI based floating rate personal loans, in the wake of rising interest rates, several consumer grievances related to elongation of loan tenor and/or increase in EMI amount, without proper communication with and/or consent of the borrowers have been received. In order to address these concerns, the REs are advised to put in place an appropriate policy framework meeting the following requirements for implementation and compliance:
i. At the time of sanction, REs shall clearly communicate to the borrowers about the possible impact of change in 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.
ii. At the time of reset of interest rates, REs shall provide the option to the borrowers to switch over to a fixed rate as per their Board approved policy. The policy, inter alia, may also specify the number of times a borrower will be allowed to switch during the tenor of the loan.
iii. The borrowers shall also be given the choice to opt for (i) enhancement in EMI or elongation of tenor or for a combination of both options; and, (ii) to prepay, either in part or in full, at any point during the tenor of the loan. Levy of foreclosure charges/ pre-payment penalty shall be subject to extant instructions.
iv. All applicable charges for switching of loans from floating to fixed rate and any other service charges/ administrative costs incidental to the exercise of the above options shall be transparently disclosed in the sanction letter and also at the time of revision of such charges/ costs by the REs from time to time.
v. REs shall ensure that the elongation of tenor in case of floating rate loan does not result in negative amortisation.
vi. REs shall share / make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which shall at the minimum, enumerate the principal and interest recovered till date, EMI amount, number of EMIs left and annualized rate of interest / Annual Percentage Rate (APR) for the entire tenor of the loan. The REs shall ensure that the statements are simple and easily understood by the borrower.
3. Apart from the equated monthly instalment loans, these instructions would also apply, mutatis mutandis, to all equated instalment based loans of different periodicities. In case of loans linked to an external benchmark under the External Benchmark Lending Rate (EBLR) regime, the banks should follow extant instructions and also put in place adequate information systems to monitor transmission of changes in the benchmark rate to the lending rate.
4. 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.
5. The above instructions are issued under sections 21, 35A and 56 of the Banking Regulation Act, 1949, sections 45JA, 45L and 45M of the Reserve Bank of India Act, 1934, and sections 30A and 32 of the National Housing Bank Act, 1987.
Yours faithfully
Santosh Kumar Panigrahy
(Chief General Manager)
1 As defined in the RBI circular No. DBR.No.BP.BC.99/08.13.100/2017-18 on “XBRL Returns – Harmonization of Banking Statistics” dated January 04, 2018.
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