The Reserve Bank of India (RBI) has laid down the guidelines allowing individual borrowers of home, car and other loans to switch over from floating to a fixed interest rate system.

Banks and non-banking financial companies (NBFCs) will have to provide borrowers an option to  move to fixed-rate interest rates at the time of resetting the loan as per their board-approved policy.

The central bank has also directed banks and non-banking financial companies (NBFCs) to provide borrowers an option to increase their equated monthly instalments (EMIs) or elongate the tenure of the loans at the time of resetting interest rates. 

The banks or NBFCs must ensure that an increase in loan tenure does not result in negative amortisation, the central bank said.

The banks and NBFCs are given time till 31 December 2023 to extend these options to existing and new loan borrowers. 

"All existing borrowers shall be sent a communication, through appropriate channels, intimating the options available to them," the central bank said.

The RBI’s circular on ‘Reset of floating interest rate on EMI based personal loans’, issued on 18 August, is set to provide borrowers the flexibility at a time when interest rates have moved up since May 2022. The repo rate has increased by 250 basis points to 6.50%, a measure the RBI has taken to tame inflation. Due to the jump in interest rates, the home loan repayment period in certain cases have got extended to as long as 50 years.

RBI said that at the time of sanction of EMI-based floating rate personal loans, banks and NBFCs should take into account the repayment capacity of borrowers to ensure that adequate headroom is available for elongation of tenor and/ or increase in EMI, if interest rate rises.

The RBI said that regulated entities (REs) such as banks and NBFCs should clearly communicate to the borrowers on how the change in the benchmark interest rate or increasing loan EMIs or tenure will impact them. Any increase in the EMI or tenure should be communicated to the borrower immediately through appropriate channels such as messages and emails, the central bank said.

Home, auto and other personal loans are linked to external benchmark rates, like repo rate.

Banks and NBFCs also have to mention the service charges or any other charges that will be levied to switch loans from floating rates to fixed rates. These details should be disclosed in the loan sanction letter and also at the time of revision charges.

“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,” RBI said in a circular to banks and NBFCs, including housing finance companies.

"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 circular added.

RBI came out with the guidelines after receiving several consumer grievances 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.