Relief For Borrowers: RBI Issues New Norms For Personal Loans; Know The Changes

Mumbai: The Reserve Bank of India (RBI) has issued new guidelines for personal loans.

Two key changes are expected to provide relief to the borrowers amid rising interest rates, reported PTI.

With most of the retail loans being on floating rates, RBI on Friday asked banks to provide fixed interest rate option to individual borrowers and directed lenders to levy only reasonable penalty charges in case of default in equated monthly instalment (EMI) payments.

In a directive to banks and NBFCs, including housing finance companies, the RBI said that several consumer grievances have been received regarding elongation of loan tenor or increase in EMI amount with regard to EMI-based floating rate personal loans, without proper communication or consent of the borrowers.

Interest rates have gone up since May 2022 as RBI hiked the repo rate to counter high inflation.

As a result of 250 basis points increase in repo rate from May 2022 till February this year, a large number of borrowers are facing negative amortisation, wherein the EMI works out to be less than the interest obligation, resulting in persistent increase of the principal amount.

“At the time of reset of interest rates, REs (Regulated Entities) shall provide the option to the borrowers to switch over to a fixed rate as per their board approved policy,” stated the notification on ‘Reset of Floating Interest Rate on EMI based Personal Loans’.

The policy, inter alia, should also specify number of times a borrower will be allowed to switch the interest rate system during the tenor of loan, RBI said.

The central bank said REs should clearly communicate to borrowers at the time of sanction about the possible impact of change in benchmark interest rate on the loan, leading to changes in EMI and/or tenor or both.

“Subsequently, any increase in the EMI/ tenor or both on account of the above shall be communicated to the borrower immediately through appropriate channels,” RBI said.

RBI has directed banks and NBFCs to ensure compliance of the instructions for existing and new loans by December 31, 2023.

“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,” RBI said.

“The quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of loan contract without being discriminatory within a particular loan / product category,” RBI made it clear.

The instructions on ‘Fair Lending Practice – Penal Charges in Loan Accounts’ will come into effect from January 1, 2024.