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RBI Makes Fixed Interest Rate Loans Mandatory for Banks

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By Rediff Money Desk, Mumbai   Jan 10, 2025 19:24

The Reserve Bank of India has mandated that banks offer fixed interest rate options for all personal loan categories. This move aims to protect borrowers from negative amortization due to rising interest rates.
RBI Makes Fixed Interest Rate Loans Mandatory for Banks
Illustration: Dominic Xavier/Rediff.com
Mumbai, Jan 10 (PTI) The RBI on Friday said it is mandatory for banks to offer fixed interest rate product in all equated installment based personal loan categories.

The FAQs on 'Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans' (August 2023) also said the circular covers all equated installment based personal loans, irrespective of whether the interest rate is linked to an external benchmark or an internal benchmark.

At the time of sanction of loans, annualised rate of interest/ annual percentage rate (APR), as applicable, should be disclosed in the Key Fact Statement (KFS) and the loan agreement, the FAQs said when and at what frequency should banks and other regulated entities (REs) communicate with the borrower.

During the tenure of the loan, any increase in the EMI/tenor on account of the external benchmark rate should be communicated.

The quarterly statements should be provided disclosing at the minimum, the principal and interest recovered till date, EMI amount, number of EMIs left and annualised rate of interest for the tenor of the loan.

Regulated entities (REs), the FAQs said have to mandatorily offer fixed interest rate product in all equated installment based personal loan categories.

REs have to 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.

In August 2023, the Reserve Bank of India directed banks to allow individual borrowers paying loans through EMIs to opt for a fixed interest rate system or extension of loan tenor, a move aimed at preventing loanees from falling into the trap of negative amortisation, in wake of rising interest rate.

The interest rates have moved northward since May 2022 after the central bank started raising the benchmark lending rate (repo) in a bid to check inflation following the outbreak of the Russia-Ukraine war.

As a result of a 250 basis points increase in the repo rate, a large number of borrowers faced negative amortisation, wherein the EMI works out to be less than the interest obligation, resulting in a persistent increase of the principal amount.
Source: PTI
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