What Borrowers Must Know about RBI’s new Floating Rate Loan EMI norms
The Reserve Bank of India has issued new guidelines to banks and home loan lenders on resetting floating interest rates on Equated Monthly Installments (EMI).
These guidelines are intended to provide borrowers with greater transparency and clarity regarding potential changes to their EMI and interest rates.
Here's what you need to know:
What are Floating Rate Loans?
Floating-rate loans are loans where the interest rate is not fixed but varies with market conditions. This means the EMI and tenure of the loan can change over time, depending on changes in the interest rate.
Home loan lenders have pegged their interest rates to the RBI’s reverse repo rate.
What are the New Guidelines issued by RBI?
The RBI's new guidelines require lenders to communicate with borrowers about potential changes to their EMI and interest rates in a clear and transparent manner.
Specifically, the guidelines require lenders to:
- Provide borrowers with a notice at least three working days before any change in the EMI or interest rate takes effect.
- Provide borrowers with a detailed explanation of the reasons for the change in the EMI or interest rate.
- Allow borrowers to switch from a floating rate to a fixed rate loan at mutually agreed terms.
- Allow borrowers to reset the loan tenure and EMI, subject to certain conditions.
- Lenders have to share with borrowers a statement at the end of each quarter which should give details of the principal and interest recovered to date, EMI amount, number of EMIs left, and annualized rate of interest/Annual Percentage Rate (APR) for the entire tenor of the loan.
- Banks have to ensure that the statements are simple and easily understood by the borrower.
Why did RBI Issue New Guidelines?
The RBI issued these guidelines to protect borrowers from being caught off guard by sudden changes in their EMIs and interest rates.
Specifically, the RBI has seen an increase in borrowers' complaints, particularly since interest rates began to rise.
Many home loan borrowers, especially, saw their loan tenure stretched or their EMIs shoot up without a heads-up.
The guidelines are intended to increase transparency and fairness in the lending process, as well as to ensure that borrowers can make informed decisions about their loans.
What Should Borrowers Do?
If you have a floating rate loan, it is important to stay informed about potential changes to your EMI and interest rate.
Make sure to read all notices and communications from your lender carefully, and ask questions if you are unsure about any changes.
If you are considering switching from a floating rate to a fixed rate loan or resetting your loan tenure and EMI, be sure to discuss the terms and conditions with your lender in detail.
The new RBI guidelines on resetting floating rate loans aim to provide greater transparency and clarity to borrowers regarding potential changes to their EMI and interest rates.
It is an effort to ensure that lenders use fair lending practises and that borrowers are made fully aware of their liabilities.