Reserve Bank of India (RBI) has issued guidelines to reset equated monthly instalments (EMIs) based on floating rate personal loans, including allowing borrowers to switch over to a fixed rate as per the bank board approved policy. Moneylife Foundation has been relentlessly campaigning against arbitrary and opaque bank policies concerning floating rate loans and also filed a public interest litigation (PIL) in the Supreme Court.
RBI has asked regulated entities (REs) to clearly communicate at the time of sanction 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. Subsequently, any increase in the EMI, tenor, or both should be communicated to the borrower immediately through appropriate channels.
At the time of resetting interest rates, RBI says, REs should provide the option to borrowers to switch over to a fixed rate as per their board-approved policy. The policy may also specify the number of times a borrower will be allowed to switch during the tenure of the loan.
"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. Levy of foreclosure charges or pre-payment penalty shall be subject to extant instructions," it added.
The RBI guidelines also ask lenders to transparently disclose in the sanction letter and also, at the time of revision, applicable charges for switching of loans from floating to fixed rate and any other service charges or administrative costs.
Further, REs are asked to share or make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which should at the minimum, enumerate the principal and interest recovered till date, EMI amount, number of EMIs left and annualised rate of interest or annual percentage rate (APR) for the entire tenor of the loan. "The REs shall ensure that the statements are simple and easily understood by the borrower."
"REs shall ensure that the elongation of tenor in case of floating rate loan does not result in negative amortisation," RBI says.
Apart from the EMI loans, RBI says, its instructions would also apply to all EMI-based loans of different periodicities. "In case of loans linked to an external benchmark under the external benchmark lending rate (EBLR) regime, the banks should follow extant instructions and also put in place adequate information systems to monitor the transmission of changes in the benchmark rate to the lending rate."
RBI has asked REs to ensure that its instructions are extended to the existing and new loans suitably by 31 December 2023. All existing borrowers should be sent a communication through appropriate channels, intimating the options available to them, it added.
Regular readers would know Moneylife Foundation has been relentlessly campaigning against arbitrary and opaque bank policies with respect to floating rate loans and filed the PIL. Borrowers, who have taken loans on a floating rate basis, suffer an immediate increase when interest rates are hiked by the RBI but do not get much relief when rates go down. This makes a mockery of the very concept of 'floating' rates. We have highlighted this issue in several articles and our Cover Story "Banksters"
RBI's decision in December 2018 was based on the recommendation by the Dr Janak Raj committee. The committee, in its 2017 report "Internal Study Group to Review the Working of the MCLR System", had provided a shocking account of how wide and deep banking malpractices are with regard to floating rate loans. It confirmed every one of our arguments about how banks cheat customers, fudge rates and extort conversion charges.
At that time, Moneylife Foundation wrote to Dr Urjit Patel, the then governor of RBI, requesting to direct banks to calculate the excess interest they have charged (through arbitrary and ad hoc calculations of base rate or MCLR) and refund the money to borrowers, especially retail borrowers and SMEs.
"The RBI should also direct banks to set up special helplines to handle complaints from borrowers whom banks have overcharged over the years. We also request the Reserve Bank to immediately issue circular/master directions asking banks and financial institutions to allow existing borrowers to migrate to MCLR or any new system without any conversion fee or any other charges for the switchover," the memorandum had said.
RBI refused to act on it. Moneylife Foundation then had to file a PIL in the Supreme Court.