 "Reserve Bank of India | File Photo")
The Reserve Bank of India (RBI) on Friday allowed floating-rate retail loan borrowers of banks and non-banking financial companies (NBFCs) to shift to fixed interest rates during the rate reset. Such a move may not gain traction immediately because, interest rates on fixed-rate loans are currently higher than floating rates.
The regulator also barred lenders from charging loan customers penal interest rates, and said they could only charge a penalty for non-compliance of terms and conditions. “Penalty, if charged, for non-compliance of material terms and conditions of loan contract by the borrower shall be treated as ‘penal charges’, and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances,” the RBI said.
The RBI asked regulated entities to ensure that the new norms were extended to the existing as well as new loans by December 31, 2023.
On floating-rate loans and the impact on equated monthly instalments (EMIs) due to a rise in interest rates, the regulator said lenders should take into account the repayment capacity of borrowers to ensure that adequate headroom or margin is available for the elongation of tenor and/or increase in EMI.
“At the time of reset of interest rates, REs (regulated entities) shall provide the option to borrowers to switch over to a fixed rate according to their Board-approved policy. The policy, inter alia, may also specify the number of times a borrower will be allowed to switch during the tenor of the loan,” the RBI said in a notification. Lenders can decide how many times a customer is allowed to switch between floating and fixed rates.
Among retail products, it’s mostly home loans where the interest rate is floating. Banks charge fixed interest rates on auto and personal loans.
The latest RBI mandate comes at a time when due to a sharp rise in interest rates since May 2022, most lenders opted to increase the tenor of the loan, thus leaving the amount of EMI unchanged. Home loans are mostly linked to the repo rate under the external benchmark loan rate regime.
In the case of a Rs 50 lakh loan with 7 per cent interest rate in May 2022, with a 15-year EMI, the repayment period would have gone up by 90 months if the EMI amount was kept unchanged, after the repo rate was increased to 6.5 per cent from 4 per cent, an illustration by BankBazaar.com showed.
The central bank said several consumer grievances related to any increase in loan tenor or EMI amount without proper communication or consent of the borrowers have been received. “All these norms are already there; they are not standardised across banks... These (new) norms have come for uniformity and standardisation,” said a senior banker from a private sector bank.
There are only a handful of banks that offer fixed-rate home loan products. Bankers said there are not many takers for such products since the rate of interest on fixed-rate loans is higher that the floating rate.
Axis Bank is among the few lenders that offer fixed-rate home loan products. For salaried customers, the fixed rate on a home loan is 14 per cent vis à vis 9-9.40 per cent charged for the floating rate product.
Adil Shetty, CEO and co-founder, BankBazaar.com, said the RBI’s mandate could increase the penetration of fixed-rate home loans over the long run. “The reason fixed rates are higher is because consumers have not bought such products. Banks have not built a large book on that side. Now, because it is being given as an option, maybe the resources will go in and fixed-rate loans will also become more competitive. Today, there is a small fraction of outstanding AUM of home loans which are fixed.”
The regulator said the borrower should also be given the choice to opt for an enhancement in EMI or elongation of tenor or a combination of both options, and also to prepay, either in part or in full, at any point during the tenor of the loan.
Importantly, the regulator said the lender should ensure that any elongation of tenor in the case of a floating rate loan does not result in negative amortisation. This means, the entire interest component for a month needs to be part of the EMI, and cannot be spilled in the next month, and added to the principal.
The 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 also at the time of revision of such charges/costs by the lenders from time to time.
