RBI circular: ‘Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans’

Subject: Economy

Section: Monetary Policy

RBI’s Guidelines on Interest Rate Reset:

Lenders must provide borrowers with clear information about how changes in the benchmark interest rate can affect personal loans.
Communicate potential changes in EMI and/or tenor during the loan sanction process.
REs to ensure that the instructions contained in the circular are extended to existing as well as new loans, suitably by December 31, 2023
Direct borrowers towards making informed decisions.

Option to Switch to Fixed Rate:

Borrowers can choose to switch to a fixed interest rate during the interest rate reset period.
The policy should define the frequency and conditions for switching during the loan term.
Banks can limit the number of switches to maintain financial stability.
Prevents borrowers from exploiting rate changes for personal gain.

Borrowers have the choice to:

Charges and Transparency:

Charges for switching and services must be fully disclosed.
Foreclosure charges or pre-payment penalties will be subject to extant instructions
Transparent communication about charges during revisions.

Quarterly Statement and Reporting

Quarterly Statements:

Lenders are required to share a statement with borrowers at the end of each quarter.
The statement should include:
- Principal and interest recovered to date.
- Remaining EMIs.
- EMI amount.
- Annualized interest rate.
Enables borrowers to track their loan progress.
Statements must be easily comprehensible.

Broad Applicability:

Personal Loan Definition

Personal loans encompass various categories:
- Consumer credit.
- Education loans.
- Loans for immovable assets.
- Loans for financial assets.
Outstanding personal loan amount: Rs 42.60 lakh crore as of June 2023.

RBI’s Directive on Penal Interest

RBI directs lenders not to charge penal interest for non-compliance, benefiting consumers.
Norms are introduced due to observed excessive penal rates by regulated entities (RE).
Penal charges are defined as additional fees for late EMI payments, defaults, and non-compliance.
No capitalization of penal charges; regular compounding for interest applies.
New guidelines apply to banks, excluding payments banks, NBFCs, housing finance, and co-operative banks.
Lenders are prohibited from adding new interest rate components; must follow board-approved policy.

Consumer Impact and Transparency

Individual borrower penalties for non-compliance aligned with non-individuals.
REs must transparently disclose penalty amounts and reasons in agreements, KFS (Key Fact Statement), and websites.
Communication of penalties with non-compliance reminders; reasons communicated.
New instructions effective from January 1, 2024; existing loans transition within 6 months or the next review (whichever is earlier).

Exemptions

Instructions are not applicable to credit cards, external borrowings, trade credits, or structured obligations.