RBI to banks: Let loanees opt for fixed interest rate

New Delhi, August 18

To provide relief to borrowers who had opted for floating interest rates when the repo rate was low, the RBI has asked banks to allow individual borrowers paying loans through EMIs to opt for fixed interest rate system or extension of the loan tenor.

The banks and non-banking financial companies (NBFCs) have been asked to ensure compliance with the instructions for the existing as well as new loans by December 31, 2023. As part of credit tightening after the effect of the Covid pandemic is over, the RBI had hiked the repo rate six times in succession since May 2022. This increase by 250 basis points caught many who had opted for floating rate of interest on the wrong foot, leading to what is called negative amortisation where the equated monthly instalment (EMI) is less than the interest obligation.

The RBI said at the time of sanction of EMI-based floating rate personal loans, banks and NBFCs should consider the repayment capacity of borrowers to ensure adequate headroom is available for elongation of tenor or increase in EMI, if interest rate rises. Home, auto and other personal loans are linked to external benchmark rates like repo rate.

“At the time of reset of interest rates, borrowers should have the option to switch over to a fixed rate as per their Board-approved policy. The policy…may also specify the number of times a borrower will be allowed to switch during the tenor of the loan,” said the RBI circular. It also said at the time of sanction, regulated entities (REs) should clearly communicate to the borrowers about the possible impact of change in benchmark interest rate on the loan leading to changes in EMI 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. REs shall ensure that the elongation of tenor in case of floating rate loan does not result in negative amortisation,” said the circular.