On Friday, the Reserve Bank of India (RBI) announced that all banks must offer fixed interest rate products for personal loans that are paid in monthly installments.
This was clarified through a set of Frequently Asked Questions (FAQs) released in response to an August 2023 circular.
The circular focused on how banks should handle floating interest rates on personal loans based on Equated Monthly Installments (EMIs).
Details of the New Guidelines
The new rule applies to all personal loans that use EMIs, regardless of whether the interest rate is linked to an external or internal benchmark.
According to the RBI, the interest rate (or annual percentage rate, APR) should be clearly stated in both the Key Fact Statement (KFS) and the loan agreement when the loan is approved.
Additionally, if there is an increase in EMI or the loan term due to changes in the external benchmark rate, this should be reported.
Banks are also required to include in their quarterly statements details such as the principal and interest charged, the EMI amount, the remaining installments, and the annual interest rate for the entire loan period.
Fixed Interest Rate Option for Borrowers
RBI’s new policy also requires banks and non-banking financial companies (NBFCs) to offer fixed interest rate options for all personal loans with monthly installments.
Borrowers will have the option to switch to a fixed interest rate as per the bank’s policy, which needs to be approved by their board of directors.
This move follows the RBI’s directive in August 2023, which allowed borrowers repaying loans with monthly installments to choose between a fixed rate or extending the loan term.
The goal is to protect borrowers from financial strain, especially amid rising interest rates. In 2022, RBI raised rates sharply to combat inflation caused by the Russia-Ukraine war. However, since February 2023, the repo rate has remained stable at 6.5%.