RBI Directs Banks to Allow Flexibility to Borrowers to Change Loan Tenure/EMIs & to Switch to a Fixed Rate of Interest

Circular No. RBI/2023-24/55 DOR.MCS.REC.32/01.01.003/2023-24, Dated 18.08.2023

Earlier, the RBI issued various guidelines pertaining to Fair Practices Code for lenders have been issued to SCBs, NBFCs and HFCs, respectively. After receiving several consumer grievances related to the elongation of loan tenor and/or increase in EMI amount, without proper communication, the RBI has now advised Regulated Entities (REs) to put in place an appropriate policy framework.

Some of the key takeaways are:

1. REs shall clearly communicate to the 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.
2. Any increase in the EMI/tenor or both on account of the above shall be communicated to the borrower immediately through appropriate channels.
3. At the time of reset of interest rates, REs shall provide the option to the borrowers to switch over to a fixed rate as per their Board approved policy.
4. The borrowers shall also be given the choice to opt for enhancement in EMI or elongation of tenor or for a combination of both options; and, to prepay, either in part or in full, at any point during the tenor of the loan.
5. All applicable charges for switching of loans from floating to fixed rate and any other service charges/administrative costs incidental to the exercise of the above options shall be transparently disclosed in the sanction letter.
6. REs shall ensure that the elongation of tenor in case of a floating rate loan does not result in negative amortisation.

REs shall ensure that the above instructions are extended to the existing as well as new loans suitably by December 31, 2023. All existing borrowers shall be sent a communication, through appropriate channels, intimating the options available to them.

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