New Delhi, August 18 Amid rising complaints by several borrowers that their loan duration and EMI amounts rise due to floating rate of loans owing to rising interest rates, the Reserve Bank of India (RBI) on Friday directed banks to clearly communicate such possibilities clearly to them at the time of issuing loans.
The central bank in a circular, has issued a set of instructions regarding floating interest rates of loans and their impact on EMIs.
It has directed banks to ensure that these instructions are conveyed to borrowers by December 31, 2023.
The directions were issued by the RBI as it had received several grievances from borrowers that owing to floating interest rates, banks hiked their loan tenure and even the EMI amount, without communicating them about the changes and also without their consent.
The RBI has said that in order to address these concerns, banks are advised to put in place an appropriate policy framework, wherein at the time of sanction, banks 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 the tenure or both.
Subsequently, any increase in the EMI or tenure or both on account of the above shall be communicated to the borrower immediately through appropriate channels, the RBI said.
At the time of reset of interest rates, banks shall provide the option to the borrowers 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.
The borrowers will also be given the choice to opt for enhancement in EMI or elongation of tenure or for a combination of both options, and to prepay, either in part or in full, at any point during the tenure of the loan.
Levy of loan foreclosure charges or pre-payment penalty shall be subject to extant instructions, the RBI said.
All applicable charges for switching of loans from floating to fixed rate and any other service charges or 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 or costs by banks from time to time.
In addition to this, banks shall ensure that the elongation of tenure in case of floating rate loan does not result in negative amortisation.
Banks shall share or make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which shall at the minimum, enumerate the principal and interest recovered till date, EMI amount, number of EMIs left and annualised rate of interest or annual percentage rate (APR) for the entire tenure of the loan.
The banks shall ensure that the statements are simple and easily understood by the borrower.
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