Executive Summary:
This RBI circular addresses consumer grievances regarding floating interest rate personal loans, specifically related to EMI and tenor adjustments. It mandates that Regulated Entities (REs) implement a policy framework to ensure transparency and borrower consent regarding changes to loan terms due to interest rate fluctuations. The instructions apply to existing and new loans and must be implemented by December 31, 2023.
Key Points / Main Content:
Communication and Transparency:
* REs must clearly communicate the potential impact of benchmark interest rate changes on EMIs and/or loan tenor at the time of loan sanction.
* Any increase in EMI or tenor due to interest rate changes must be immediately communicated to the borrower.
Borrower Options:
* At the time of interest rate reset, borrowers must be given the option to switch to a fixed interest rate, as per the REs' board-approved policy.
* Borrowers must be given the choice to:
* Enhance EMI, elongate tenor, or use a combination of both.
* Prepay the loan, partially or fully, at any point (subject to existing instructions on foreclosure charges).
Fees and Charges:
* All applicable charges for switching from floating to fixed rates, and any other related service or administrative costs, must be transparently disclosed in the sanction letter and whenever such charges are revised.
Loan Structure:
* Elongation of tenor on floating rate loans must not result in negative amortization.
Statement Provision:
* REs must provide borrowers with a quarterly statement detailing:
* Principal and interest recovered.
* EMI amount.
* Number of EMIs remaining.
* Annualized interest rate (APR) for the entire loan tenor.
* Statements should be simple and easily understood.
Scope:
* Instructions apply to all equated installment-based loans of different periodicities.
* For EBLR loans, banks should follow existing instructions and ensure adequate systems to monitor benchmark rate transmission.
Implementation:
* REs must extend these instructions to existing and new loans by December 31, 2023.
* All existing borrowers must be informed of the available options.
Impact Analysis:
Regulated Entities (SCBs, RRBs, UCBs, StCBs, DCCBs, NBFCs, HFCs):
* Impact: Must create and implement a policy framework that complies with the new guidelines, ensuring transparency and providing options to borrowers.
* Action Required: Develop and implement the required policy changes and communication strategies by December 31, 2023.
Borrowers:
* Impact: Will receive clearer communication about potential changes to loan terms and will have more options to manage their loans in response to interest rate fluctuations.
* Action Required: Review communications from REs and understand the options available to them regarding their floating-rate EMI-based personal loans.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector and monetary policy.
Scheduled Commercial Banks: Banks that are listed in the Second Schedule of the Reserve Bank of India Act, 1934.
Regional Rural Banks: Banks established to cater to the needs of rural populations.
Urban Cooperative Banks: Primary cooperative banks located in urban and semi-urban areas.
Non-Banking Financial Companies: Companies engaged in the business of loans and advances, acquisition of shares, stock, bonds, debentures or other securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale, purchase, construction or immovable property.
Housing Finance Companies: Companies that are primarily engaged in the business of providing finance for housing.
Banking Regulation Act, 1949: An act to consolidate and amend the law relating to banking companies.
Mumbai, Maharashtra: City in India where the Central Office of the Department of Regulation, Reserve Bank of India is located.
भारतीय �रज़व� ब�क
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
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.
िविनयमन िवभाग, क�द्रीय काया�लय, 12वी ंऔर 13वी ंमंिज़ल, क�द्रीय काया�लय भवन, शहीद भगत िसंह माग�, मुंबई 400001
टेलीफोन /Tel No: 22601000 फै�/ Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
Department of Regulation, Central Office, 12th & 13th Floor, Central Office Building, Shaheed Bhagat Singh Marg, Mumbai – 400001
Tel No: 22601000 Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
ब�क िहंदी म� पत्राचार का �ागत करता है
Caution: RBI never sends mails, SMSs or makes calls asking for personal information like bank account details, passwords, etc. It never keeps or
offers funds to anyone. Please do not respond in any manner to such offers.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 theminimum, 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)