The transition of loans from floating to fixed rates | Explained Premium

What has RBI said about allowing borrowers to transition from floating to fixed rates for loans? We take a look.

The story so far: On August 18, apex banking regulator the Reserve Bank of India (RBI) issued guidelines enabling a borrower to transition from a floating interest rate-based loan to one with a fixed interest rate.

According to RBI, the endeavour was to address borrowers’ grievances pertaining to elongation of loan tenure and/or increase in the EMI amount in the event of an increase in the benchmark interest rate. A lack of proper communication along with the absence of consent too formed part of the concerns.

The provisions would be extended to existing as well as new loans by the end of the current calendar year. 

As stated above, the apex banking regulator has given borrowers the option to switch over to a fixed (interest) rate mechanism for their loans from floating rates. This would be based on a board-approved policy drafted by the lending entity. The policy must also specify the number of times such a switch would be allowing during the tenure.

The lender must also transparently communicate to the borrower all relevant charges alongside service charges or administrative costs associated with the transition. 

The responsibility would rest with the lender to communicate clearly, at the time of loan sanction, the impact emanating from the change in regime (floating to fixed), such as the change in EMI and/or tenure of the loan or both. Additionally, the borrower would now also have the option to choose between enhancement of the EMI or elongation of the tenure or a combination of both. S/he might also opt to prepay the loan, either in part or full, at any point during the tenure. This would, however, still invite foreclosure charges or pre-payment penalty.

 Further, the regulator has sought that lending entities provide borrowers, through appropriate channels, a statement at the end of each quarter enumerating the principal and interest recovered till date, EMI amount, number of EMIs left and annualised rate of interest/ Annual Percentage Rate (APR) — for the entire tenure of the loan. RBI has asked for the statement to be “simple and easily understood by the borrower”.