Regulated Entities (REs) /banks cannot increase the tenor of EMI-based loans without giving borrowers a choice of either increasing the EMI amount or elongation of the loan tenor, according to a notification issued by the RBI. The notification will apply to all equated instalment-based loans of different periodicities.

“At the time of sanction of EMI based floating rate personal loans, REs are required to take into account the repayment capacity of borrowers to ensure that adequate headroom/ margin is available for elongation of tenor and/ or increase in EMI, in the scenario of possible increase in the external benchmark rate during the tenor of the loan,” Reserve Bank of India (RBI) said in the notification today (August 18).

“However, in respect of EMI based floating rate personal loans, in the wake of rising interest rates, several consumer grievances related to elongation of loan tenor and/or increase in EMI amount, without proper communication with and/or consent of the borrowers have been received,” it added.

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The RBI has advised REs to put in place an appropriate policy framework meeting the following requirements for implementation and compliance:

  1. At the time of loan sanction, REs shall clearly communicate to the borrowers about the possible impact of change in 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 on account of the above shall be communicated to the borrower immediately through appropriate channels.
  2. 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. The policy may also specify the number of times a borrower will be allowed to switch during the tenor of the loan.
  3. The borrowers shall also be given the choice to opt for (i) enhancement in EMI or elongation of tenor or for a combination of both options; and, (ii) to prepay, either in part or in full, at any point during the tenor of the loan. Levy of foreclosure charges/ pre-payment penalty shall be subject to extant instructions.
  4. 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 and also at the time of revision of such charges/ costs by the REs from time to time.
  5. REs shall ensure that the elongation of tenor in case of floating rate loan does not result in negative amortisation.
  6. REs shall share/make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which shall at the minimum, enumerate the principal and interest recovered till date, EMI amount, number of EMIs left and annualized rate of interest/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.

The RBI said that apart from equated monthly instalment loans, the above instructions would also apply to all equated instalment-based loans of different periodicities.

“Apart from the equated monthly instalment loans, these instructions would also apply, mutatis mutandis, to all equated instalment based loans of different periodicities,” RBI said.

“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 transmission of changes in the benchmark rate to the lending rate,” it added.

The central bank has instructed banks to extend the above instructions 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,” RBI said.