Lenders must offer fixed-rate products for EMI-based loans, says RBI

The Reserve Bank of India (RBI) has reiterated that banks and non-banking finance companies (NBFCs) must offer fixed rate products for any equated monthly instalment based retail loans like home and auto loans.

 

In a frequently asked questions released on Friday, the banking regulator said, “REs have to mandatorily offer fixed interest rate product in all equated installment based personal loan categories. REs shall provide the option to the borrowers to switch over to a fixed rate as per their Board approved policy at the time of reset of interest rates.”

 

 According to RBI’s definition, personal loans refers to loans given to individuals and consist of consumer credit, education loan, loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), and loans given for investment in financial assets (shares, debentures, etc.).

 

 

 While lenders offer fixed rate auto loans, unsecured personal loans, not many banks and NBFCs have fixed rate products for home loans.

 

“Typically, fixed loans are 100-300 basis points more expensive compared to floating rate loans,” said Adhil Shetty, CEO, BankBazaar.com.

 

“Consequently, most fixed loans tend to be fixed only for a specific period, after which it will be subject to a reset. However, with the RBI specifying that there should be fixed rate loans for customers to choose from, we may see more of these products in the future,” Shetty told Business Standard.

 

RBI has also said customers will also have the option to revert back to floating loans from fixed rate loans. The regulated entity is required to specify the number of times a borrower will be allowed to exercise the switch option during the tenor of the loan under its board approved policy. The regulator said the idea is to provide flexibility to borrowers to switch from floating rate loan to fixed rate loan or vice versa subject to applicable charges.

 

 “The applicable charges shall be as approved by the board of the RE and shall be displayed on their website as per extant instructions,” RBI said.

 

 It was also clarified that such switch options should be applicable for all equated installment based personal loans, irrespective of whether they are linked to an external benchmark or an internal benchmark like base rate or marginal cost of fund based lending rate.

 

According to BankBazaar.com, almost 60% of consumers are on an external benchmark-linked rate (EBLR). Private and foreign banks have 85% and 91% loans on EBLR. However, this number sharply falls to 43% in case of public sector banks.

 

“Given the indications from the RBI and the macro-economic trends, chances are that we will soon be entering a cycle of rate cuts. If you are not on EBLR, this would be a good time to make a switch as loan spreads are low and once rates begin to fall, any rate cuts would reflect on your loan interest rates within three months,” Shetty added.  

 

The regulator has also clarified on the options that should be made available to address the increase in EMI in a rising interest rate scenario.

 

 The options are either enhancement in EMI or elongation of the number of EMIs, keeping the EMI unchanged or a combination of both options. Switch to fixed interest rate for the remaining portion of the loan, and to prepay, either in part or in full, at any point during the residual tenor of the loan.