RBI calls for transparency in EMI reset, penal levies

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MUMBAI : Borrowers will soon get to choose whether to pay higher equated monthly instalments (EMIs) or repay their loan over a longer period when banks raise interest rates. They can also expect greater transparency from lenders on penalties if they miss out on repayments. In the first of two circulars issued on Friday, the Reserve Bank of India (RBI) said banks and non-banks should provide individual borrowers with the option to switch to a fixed rate at the time of resetting interest rates.

Lenders should also communicate to borrowers about the possible impact of a change in the benchmark interest rate on the loan leading to changes in EMI and/or tenor or both. Borrowers should be given a choice to pay a higher EMI or opt for a longer tenure, or a combination of both, and to prepay, either in part or in full, at any point during a loan tenure, RBI said. The rules will take effect on 31 December.

The guidelines come amid consumer grievances related to the lengthening of loan tenures and the increase in EMI on floating-rate personal loans amid rising interest rates. “Some banks were found extending the tenure on home loans beyond 40 years at the time of rising interest rates, which meant the borrower will have to keep repaying even they are 80 years old," a banker said. In the last monetary policy press conference, RBI governor Shaktikanta Das also clarified that banks would have to assess the resetting of loan tenure depending on borrowers’ payment capacity and age.

“To avoid unduly long elongation, which sometimes may, going forward, camouflage underlying stress in a loan, therefore an extension of tenor should be for a reasonable period. We don’t want to define it. It’s a commercial decision of the bank," Das said.