Guidelines on Reset of Floating Interest Rate on EMI-Based Personal Loans

The Reserve Bank of India (RBI) had previously issued guidelines regarding the Fair Practices Code for lenders vide in circular bearing reference number DBR.No. Dir.BC.10/13.03.00/2015-16 dated July 1, 2015. According to these guidelines, Regulated Entities (REs) are permitted to offer various types of loans with either fixed or variable interest rates.

When granting EMI-based floating rate personal loans, REs must evaluate the borrowers’ repayment capacity, guaranteeing that there is adequate flexibility to extend the loan term or increase the EMI amount if the external benchmark rate increases during the loan’s duration.

There have been multiple instances where consumers have expressed dissatisfaction with the extension of loan tenure and/or increase in equated monthly instalments (EMI) without appropriate communication and/or consent from the borrowers. These complaints have been raised as a result of the rise in interest rates.

To effectively address these concerns, RBI has provided instructions for the reset of floating interest rate on equated monthly instalments (EMI) vide circular bearing reference number RBI/2023-24/55 DOR.MCS.REC.32/01.01.003/2023-24 dated August 18, 2023.

These instructions shall apply to:

• All Scheduled Commercial Banks
• Regional Rural Banks, excluding Payments Banks
• Primary (Urban) Co-operative Banks
• All NBFCs (including HFCs) and
• State Co-operative Banks and District Central Co-operative Banks

The REs are required to fulfil the below-mentioned criteria:

1. The borrowers shall be informed by REs about the potential consequences of a modification in the benchmark interest rate on the loan, which may lead to adjustments in the EMI and/or tenure, or both, at the time of approval. The borrower must be promptly informed through appropriate means of any increase in the EMI, tenor, or both resulting from the mentioned circumstances.
2. REs shall offer borrowers the option to switch to a fixed rate as per their Board-approved policy at interest rate reset. The policy may also limit the number of times a borrower can swap during the loan term.
3. Borrowers can choose to increase the Equated Monthly Installment (EMI), prolong the loan period, or make partial or complete prepayments at any time during the loan term. The imposition of foreclosure charges or pre-payment penalties will be in accordance with existing regulations.
4. The sanction letter and any future updates by REs will clearly identify all charges for moving loans from floating to fixed rates, including service charges and administrative fees.
5. REs must ensure that extending the term of a loan with a floating interest rate does not result in negative amortization.
6. REs must submit quarterly statements to borrowers, including principal and interest recovered, EMI amount, remaining EMIs, and APR for the loan period. REs must make borrower statements easy to understand.

These instructions are applicable to all equated instalment-based loans with different repayment periods, including equated monthly instalment loans. By December 31, 2023, REs must ensure that the above instructions are extended to both existing and new loans.