Comprehensive Guide: Understanding Floating Interest Rates on EMI-Based Personal Loans

Mumbai, Jan 10 (NationPress) The RBI on Friday unveiled a series of FAQs to shed light on its circular concerning the 'Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans' and to offer borrowers a clearer understanding of the associated clauses.

Here are the FAQs:

Q.1 Is the circular applicable to all loan products or just personal loans?

Ans: The circular pertains solely to all equated periodic instalment-based personal loans. It does not extend to other loan categories.

Q.2 According to paragraph 2(i) and paragraph 4 of the circular, regulated entities (banks and NBFCs) must inform borrowers about the implications of interest rate resets on EMIs for floating rate personal loans, both during sanction and throughout the loan term. When and how often should regulated entities communicate with borrowers, and what should this communication include?

Ans: The communications outlined in the circular are:

(a) At the time of sanction:

i. The annualized interest rate/Annual Percentage Rate (APR), where applicable, must be disclosed in the Key Fact Statement (KFS) and the loan agreement.

ii. The potential effects of changes in the benchmark interest rate on the loan.

(b) During the loan tenure:

i. Any increase in the EMI or loan tenor due to the external benchmark rate will be communicated;

ii. Quarterly statements must be provided, detailing the principal and interest amounts paid, EMI amount, remaining number of EMIs, and the annualized interest rate for the loan's duration.

Q.3 In accordance with paragraph 4 of the circular, regulated entities are advised to inform borrowers about various options available to manage EMI increases in a rising interest rate environment. What options do borrowers have during a rising interest rate cycle for equated instalment-based personal loans?

Ans: When interest rates are reset for a specific borrower class in a loan category, such as home loans, regulated entities must offer the following options:

a. Increasing the EMI or extending the number of EMIs while keeping the EMI unchanged, or a combination of both;

b. Transitioning to a fixed interest rate for the remaining loan period;

c. Making partial or full prepayments at any time during the remaining loan tenure.

Q.4 One option available to borrowers as per paragraph 2(ii) of the circular is the ability to switch from a floating interest rate loan to a fixed interest rate according to their Board-approved policy. If regulated entities currently lack fixed interest rate products in any loan category, such as home loans, are they required to introduce such a product?

Ans: Yes, regulated entities must offer fixed interest rate products across all equated installment-based personal loan categories. As stated in paragraph 2(ii) of the circular, they are obligated to provide borrowers the option to switch to a fixed rate during interest rate resets, following their Board-approved policy.

Q.5 After a customer opts to switch from a floating interest rate loan to a fixed interest rate loan as permitted by paragraph 2(ii) of the circular, are regulated entities required to provide the option to revert to a floating rate loan?

Ans: Yes, the circular aims to grant customers the flexibility to switch between floating and fixed rate loans, subject to applicable charges. Regulated entities must specify how often borrowers can utilize the switch option during the loan's tenure, according to their Board-approved policy.

Q.6 Does the circular cover only loans linked to external benchmarks or also those linked to internal benchmarks (Base Rate/MCLR/BPLR)?

Ans: The circular clarifies that it encompasses all equated installment-based personal loans, regardless of whether they are linked to external or internal benchmarks.

Q.7 Are regulated entities permitted to impose applicable charges for switching loans between fixed and floating interest rates?

Ans: Yes, as indicated in paragraph 2(iv) of the circular, regulated entities can impose relevant charges for switching between floating and fixed rates, along with any associated service or administrative costs. These charges must be transparently disclosed in the sanction letter and updated whenever such charges are revised by the entities.

The applicable charges must be approved by the boards of banks and NBFCs and should be displayed on their websites in accordance with existing instructions.

Q.8 Current instructions for UCBs permit a maximum tenure of 20 years for housing loans. If a borrower opts for an elongation of loan tenure during the switch from floating to fixed rates, can UCBs extend the housing loan beyond 20 years?

Ans: The options specified in the circular regarding ‘Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans’ dated August 18, 2023, will be applicable to housing loans provided by UCBs, subject to the regulations outlined in the Master Circular on ‘Housing Finance for UCBs’ dated April 11, 2023, or any future amendments.

Q.9 Will this circular also apply to existing borrowers?

Ans: Yes, the circular is applicable to existing borrowers.