Has your bank increased the tenor on your floating rate home loan without clear consent? That could soon change. The Reserve Bank of India plans to introduce a framework, which among other things, aims to bring greater transparency in interest rate reset of equated monthly installments (EMI) based floating interest loans.
In the wake of the Covid-19 pandemic, the RBI had slashed interest rates sharply. With banks slow to pass on the cuts, the central bank pushed them to launch products that would be linked to an external benchmark, which would ensure quicker transmission of rates.
Since then, many lenders now offer loans with interest rates based on RBI's repo rate plus an additional markup or margin. In such loans, as and when the repo rate changes, the interest rate changes too. Typically, the EMIs should also rise when rates rise. But, at times banks just increase the tenor of the loan, with or without informing the borrower.
"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," the RBI said in its statement on developmental and regulatory policies.
To address the issue, RBI has proposed to put in place a proper conduct framework to be implemented by all regulated entities to address the issues faced by the borrowers.
The framework will require regulated entities to clearly communicate with borrowers for resetting the tenor of the loan and or the EMI. Further, options for switching to fixed rate loans or foreclosure of loans will have to be provided. The regulated entities will also have to disclose various charges incidental to the exercise of the options and ensure proper communication of key information to borrowers.
"These measures will further strengthen consumer protection," said RBI Governor Shaktikanta Das.
The detailed guidelines in this regard are to be issued shortly, according to the RBI.
