The Reserve Bank of India has asked banks to allow retail customers to switch from floating rate loans to fixed rate.
"In terms of extant instructions of Reserve Bank of India, regulated entities (REs) have the freedom to offer all categories of advances, either on fixed or on floating interest rates basis," the RBI said in a circular.
The central bank said that several customer complaints related to elongation of loan tenor or increase in EMI amount were received in case of floating-rate loans. Hence, lenders are now also required to take into account the repayment capacity of borrowers while sanctioning these loans.
As a part of the new rules, the central bank said:
Banks and non-banking financing companies must specify the number of times a borrower will be allowed to switch during the tenor of the loan.
They must clearly communicate the possible impact of change in the benchmark interest rate on the loan and the EMI.
Borrowers must be given either the option to extend the EMI tenor or prepay, either in part or in full, at any point during the tenor of the loan.
Charges, if any, for switching of loans, must be communicated to the borrowers.
The central bank has further asked all regulated entities to ensure that these new rules apply to the existing as well as new loans by Dec. 31, 2023. Apart from the EMIs, these instructions also apply to equated instalment based loans of different tenors.
The announcement comes after the central bank proposed a "transparent" framework for resetting interest rates and EMIs on floating-rate home loans, in the monetary policy committee address on Aug. 10.
"The extension of tenor of loans should be for a reasonable period. Banks and their boards should assess elongation of floating rate loans," RBI Governor Shaktikanta Das said.
Suresh Khatanhar, deputy managing director at IDBI Bank, expects limited impact from the move. For a customer, it helps bring more transparency and benefits them, he said.
To bring about uniformity and standardisation amid rising interest rates, some banks were giving extensions and some were not, he said. While every bank has a separate risk appetite, elongation of tenors will now vary and the age factor will come in, he said.
Banks have a cut-off age for each segment like for the self-employed segment, he explained. The changes will largely affect personal loans and home loans, and banks may have to apply service charges on switching, he said.
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