In the backdrop of the repayment period of home and other loans getting elongated due to stress from rising EMIs as interest rates climb, the Reserve Bank of India (RBI) has said it will soon come out with a framework allowing borrowers to switch from floating to fixed interest rates.

RBI Governor Shaktikanta Das has said that the lenders will have to clearly communicate with the borrowers about the tenor and EMIs of their loans.

"The supervisory reviews undertaken by the Reserve Bank and the feedback and references from members of public have revealed several instances of unreasonable elongation of tenor of floating rate loans by lenders without proper consent and communication to the borrowers," Das said while unveiling the bi-monthly monetary policy on Thursday.

After the RBI started increasing the repo rate since May last year, borrowers whose loans were linked to external benchmarks were faced with the choice of either increasing their monthly repayments or extending the repayment period or a combination of both. In certain cases, the home loan repayment period got extended to as long as 50 years.

To address this, the RBI is set to make rules to strengthen consumer protection and enhance transparency in interest rate and tenor resets for floating loans. The policy framework, to be implemented by all regulated entities, will provide relief to borrowers of home, auto and other loans by providing clarity to them on resetting the tenor and EMIs.

"The framework envisages that lenders should clearly communicate with the borrowers for resetting the tenor and/or EMI (equated monthly instalment), provide options of switching to fixed rate loans or foreclosure of loans, transparent disclosure of various charges incidental to the exercise of these options, and proper communication of key information to the borrowers," Das said.

The detailed guidelines in this regard would be issued shortly, he added.

How would RBI define a tenor elongation as unreasonable? The RBI Governor said it is something banks will have to assess, taking into account the payment capacity of the borrower. “Banks will also have to take into consideration the age factor. It will vary from individual to individual. Also, it is necessary to avoid unduly long elongation, which sometimes may, going forward, camouflage an underlying stress in a particular loan," Das said.

While the regulator would just provide broad guidelines, individual banks would have to take the commercial decision, Das added.

Experts said the drive to make the process more transparent would at least make the borrowers more informed of the changes while availing loans.

Said AM Karthik, vice-president, financial sector ratings, Icra, “Given the increasing realisation of credit, proposals to transparently disclose the implication of interest rate resets in floating-rate loans and corresponding changes in the tenors, and/or the changes in EMI is a welcome move to educate and inform the borrowers as they can better understand the impact of the changes in these terms while availing loans." 

Some experts believe not many borrowers will make the shift to a fixed rate of interest rate as we are at the peak of the rate cycle and rates are likely to fall from here.

“We don’t think there will be much shift to a fixed regime as interest rates are expected to come down though in FY25 and not FY24," said Jahnavi Prabhakar, an economist at Bank of Baroda.