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RBI’s FAQ: Banks Required to Offer Fixed Interest Rate Options for EMI-Based Personal Loans

Banks must now provide fixed interest rates on all personal loans with EMIs to shield borrowers from raising rates, according to the RBI

The Reserve Bank of India (RBI) has directed that all banks provide a fixed interest rate option for all equated installment-based personal loans. The FAQs on the Reset of Floating Interest Rates for EMI-based Personal Loans, which were published in August 2023. The circular covers all personal loans with equated installments, regardless of whether the interest rate is tied to an external or internal benchmark.

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According to the RBI, borrowers should be informed of the Annual Percentage Rate (APR) at the time of loan approval. This information should also be included in the Key Fact Statement (KFS) and the loan agreement. It also emphasized the importance of clearly communicating the frequency and timing of updates between banks or regulated entities (REs) and the borrower.

The borrower must be informed of any rise in the loan tenor or EMI that results from modifications in the external benchmark rate during the loan's term. Also, the banks must provide quarterly statements detailing the principal and interest paid to date, the EMI amount, the number of EMIs remaining, and the annualized rate of interest for the duration of the loan.

In addition, regulated enterprises (REs) must provide borrowers the option to switch to a fixed rate when interest rates are adjusted in accordance with their board-approved policy. With this option, borrowers are shielded against negative amortisation, which can happen when principal rises as EMIs aren't enough to pay interest.

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As stated by PTI, the RBI raised the repo rate by 250 basis points in order to curb inflation, and this move comes after interest rates have been climbing since May 2022. Many borrowers have faced challenges, including negative amortization due to this rise in rates.

By ensuring increased transparency and consumer protection, the RBI's decision enables borrowers to better manage their loans in the face of shifting interest rates.

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