The Reserve Bank of India instructed banks to offer a fixed interest rate choice to individual borrowers and mandated lenders to impose fair penalty charges for missed EMI payments.

The two decisions are expected to provide a relief to the borrowers amid rising interest rates and most of the retail loans being on floating rates now.

In a directive to banks and NBFCs, including housing finance companies, the Reserve Bank of India (RBI) said that several consumer grievances have been received in relation to elongation of loan tenor or increase in EMI amount with regard to EMI-based floating rate personal loans, without proper communication or consent of the borrowers.

Interest rates have risen since May last year as the central bank hiked the repo rate to tame high inflation.

As a result of 250 basis points increase in the repo rate from May 2022 till February this year, a large number of borrowers are facing negative amortisation, wherein the Equated Monthly Instalment (EMI) works out to be less than the interest obligation, resulting in persistent increase of the principal amount.

"At the time of reset of interest rates, REs (Regulated Entities) shall provide the option to the borrowers to switch over to a fixed rate as per their board approved policy," as per the notification on 'Reset of Floating Interest Rate on EMI based Personal Loans'.

Also, in future loan sanction letters will have to disclose the charges for switching a loan from a floating to a fixed rate at a future date. If rates rise sharply, lenders must ensure that the EMI continues to cover the monthly interest on the loan and that the loan outstanding does not increase from the previous month’s level after EMI is paid.

Source: TimesofIndia and TheFederal