The Reserve Bank of India (RBI) on Friday allowed floating rate retail loan borrowers of banks and non-banking financial companies (NBFCs) to move to fixed interest rates during the rate reset. Such a move may not gain momentum immediately as currently, interest rates on fixed-rate loans are higher than floating rates.
The regulator also barred lenders from charging penal interest rates from loan customers, and said they can impose penalty only for non-compliance of terms and conditions. “Penalty, if levied, for non-observance of material terms and conditions of the loan agreement by the borrower, shall be treated as ‘penal fee’ and shall not be levied as ‘penal interest’ which shall be added to the rate Interest charged on advances,” RBI said.
RBI asked regulated entities to ensure that the new norms are implemented on existing as well as new loans by December 31, 2023.
On floating rate loans and the impact on Equated Monthly Installments (EMIs) due to increase in interest rates, the regulator said lenders should take into account the repayment capacity of borrowers to ensure that sufficient headroom or margin is available for extending the tenure. Is. / or increase in EMI.
“At the time of reset of interest rates, REs (regulated entities) will provide an option to borrowers to switch to a fixed rate as per their board-approved policy. The policy, inter alia, may also specify the number of times the borrower will be allowed to switch during the tenure of the loan,” RBI said in a notification. Lenders can decide how often a customer is allowed to switch between floating and fixed rates.
In retail products, it is mostly home loans where the interest rate is volatile. Banks charge fixed interest rates on auto or personal loans.
The latest RBI order comes at a time when due to a sharp increase in interest rates from May 2022, most lenders opted to extend the loan tenure, leaving the EMI amount unchanged. Home loans are mostly linked to the repo rate under the external benchmark lending rate regime.
In case of a Rs 50 lakh loan with 15 years EMI due in May 2022 with 7 per cent interest rate, the repayment tenure would have increased by 90 months if the EMI amount had been kept unchanged after the repo rate hike. An example from BankBazaar.com shows that it has increased from 4 per cent to 6.5 per cent.
The central bank said that several consumer complaints have been received relating to any increase in the loan tenure or EMI amount without proper communication or consent of the borrowers. “All these norms are already there; They are not standardized across banks… These (new) norms have come for uniformity and standardisation,” said a senior banker at a private sector bank.
There are only a few banks that offer fixed rate home loan products. Bankers said there are not many takers for such products as the interest rate on fixed-rate loans is higher than floating rates.
Axis Bank is one of the few lenders that offer fixed rate home loan products. For salaried customers, the fixed rate on home loans is 14 per cent, while 9-9.40 per cent is charged for floating rate products.
Adil Shetty, CEO and co-founder, BankBazaar.com, said the RBI order could increase access to fixed-rate home loans in the long run. “The reason the fixed rates are high is because consumers have not bought such products. Banks hasn’t built up any big books on that side. Now, because it’s being offered as an option, perhaps the resources will take and fixed-rate loans will also become more competitive. Today, a small portion of the outstanding AUM of the home loan is settled.
The regulator said the borrower should be given the option to opt for increasing the EMI or extending the tenor or a combination of both, and also be given the option to prepay, partially or fully, at any time during the tenure of the loan. ,
Importantly, the regulator said that the lender should ensure that in case of floating rate loans, any increase in tenure does not result in negative amortization. This means, the entire interest component for a month has to be part of the EMI, and cannot be spent in the next month, and added to the principal.
RBI has also said that all applicable charges for switching loans from floating to fixed rate should be transparently disclosed in the sanction letter and at the time of revision of such charges/costs by the lenders from time to time.