RBI Offers Flexibility in Personal Loan Interest Rate Reset

• 21 Aug 2023

On 18^th August, The Reserve Bank of India (RBI) introduced a significant policy shift by directing all regulated entities, including banks and NBFCs, to provide personal loan borrowers with the option to switch from floating interest rates to fixed rates during interest rate resets.

Key Points:

• Borrower-Centric Regulations: This initiative, outlined in a circular titled 'Reset of floating interest rate on equated monthly instalments (EMI) based personal loans,' aims to empower borrowers with greater control over their loan structures.
• Change of Tenure: Additionally, borrowers can opt for EMI enhancements or tenor elongation, further customizing their loan experience.
• Switch to Fixed Rates: At interest rate resets, borrowers now have the choice to switch to fixed interest rates in accordance with the lender's board-approved policy.
• Disclosure of Charges: Lenders are mandated to disclose all applicable charges for switching loans from floating to fixed rates, as well as any service charges or administrative costs.
• These details must be presented in the sanction letter and communicated when changes in charges occur.
• Enhanced Transparency: To enhance transparency, lenders are required to provide borrowers with quarterly statements through appropriate channels.
• These statements will include information on principal and interest payments, EMI amounts, remaining EMIs, and annualized interest rates.
• Implementation Deadline: The RBI has mandated that these instructions must be extended to both existing and new loans by December 31, 2023.
• Rationale behind RBI's Move: The RBI's decision to implement these regulations stems from supervisory reviews and feedback from the public, which highlighted instances of lenders significantly elongating tenors for floating rate loans without proper consent.