Provide borrowers option to switch to fixed interest rates, RBI tells banks

Mumbai, August 18

The Reserve Bank on Friday asked banks and other lenders to provide individual borrowers an option of switching over to a fixed rate at the time of reset of interest rates.

In a notification, it said 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 borrowers have been received.

In order to address these concerns, the RBI asked entities regulated by it to put in place an appropriate policy framework.

“At the time of sanction, Regulated Entities (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,” the RBI said.

It said that 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, the RBI said, 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 for a combination of both options.

They should also be given an option to prepay, either in part or in full, at any point during the tenor of the loan.