Personal Loan EMI: To give more control to borrowers, the Reserve Bank of India (RBI) has clarified the norms for switching personal loan interest rates. According to the new guidelines, banks will have to give flexibility to borrowers to switch from floating to fixed interest rates when the interest rates of their loans are reset. This development is to give borrowers control over their loan terms and avoid uncertainty in the event of changing interest rates.
Highlights of RBI Guidelines
RBI’s new directives have been explained through an FAQ which is applicable when the floating interest rates are reset. Here are some key points:
1. Mandatory Fixed Rate Option:
Banks must provide borrowers with the option of fixed interest rate product for every EMI-based personal loan category.
2. Flexibility during Interest Rate Reset:
Borrowers whose loans are on floating interest rate should be given the option to switch to fixed rate once the interest rate is reset.
Example: If Mr. X has taken a personal loan at 11% floating rate and after 6 months the bank reduces the interest rate to 12%, then the bank must inform Mr. X and provide him the option to switch to fixed rate.
3. Comprehensive Coverage:
The guidelines are applicable to every EMI-based personal loan, whether linked to an external or internal benchmark. This is inclusive for both existing and new borrowers.
Options for Borrowers
Once the interest rate is reset, borrowers have 3 options to manage their loans:
1. Adjust Loan Tenure or EMI Amount:
o Borrowers can choose to increase the loan tenure, increase the EMI amount or a combination of both. This will reduce the monthly budget burden.
2. Switch to Fixed Rate:
o Banks will have to give borrowers the option to switch to fixed interest rate. This option is more useful in situations when interest rates are rising, as it gives stability and predictability in payments.
3. Prepay the loan:
Borrowers can prepay their loans partially or fully at any time. This will reduce the overall interest burden.
Additional Costs and Disclosures
RBI guidelines promote borrower-friendly practices but also allow banks to charge certain charges to switch between floating and fixed rates. These charges (service charges or administrative fees) have to be disclosed in a transparent manner in the loan sanction letter and at the time of revisions. Borrowers should be aware of these costs and take their decisions accordingly.
Benefits for Borrowers
The new guidelines create a transparent and flexible lending environment for borrowers. Some of its benefits are:
• Enhanced Control: Borrowers can take decisions according to their financial goals and market conditions.
• Stability in Payments: Switching to fixed rate provides protection from uncertainty of rising interest rates.
• Transparency: Mandatory disclosure of associated costs protects borrowers from unexpected charges.
Conclusion
RBI’s new norms on resetting of floating interest rates is a big step towards financial inclusivity and borrower empowerment. Providing fixed rate options and bringing transparency in associated costs promotes an equitable and borrower-friendly financial system.
This is an opportunity for borrowers to re-assess their loan strategies and choose options according to their financial needs and risk appetite. Whether it’s taking payment stability at a fixed rate, managing budget better by adjusting EMIs, or making prepayments to reduce interest costs, the new guidelines provide borrowers with the necessary tools and information to make prudent financial decisions.
