RBI Mandates Banks To Offer Fixed Rate Personal Loans
Date
1/11/2025 2:27:11 PM
(MENAFN- KNN India)
New Delhi, Jan 11 (KNN) The Reserve bank of India announced on Friday that banks must offer fixed interest rate options for all personal loans that are based on equated installments, introducing a significant change in lending practices.
This requirement applies to all equated installment-based personal loans, regardless of whether the interest rate is tied to external or internal benchmarks.
The central bank has outlined comprehensive disclosure requirements, mandating that banks must clearly communicate the annualised interest rate and annual percentage rate at the time of loan sanction through both the Key Fact Statement and loan agreement.
Additionally, any changes in EMI or loan tenure due to external benchmark rate adjustments must be promptly communicated to borrowers.
Under the new guidelines, banks and regulated entities must provide quarterly statements to borrowers detailing crucial information including the principal and interest recovered, EMI amount, remaining number of EMIs, and the annualised interest rate for the loan tenure.
The regulated entities must also allow borrowers to switch to fixed interest rates according to their board-approved policies when interest rates are reset.
This regulatory move, initially introduced in August 2023, aims to protect borrowers from negative amortisation, a situation where EMI payments become insufficient to cover interest obligations, leading to an increase in the principal amount.
The concern arose following the central bank's series of repo rate hikes since May 2022, implemented to control inflation after the Russia-Ukraine conflict began.
The policy responds to challenges created by the 250 basis points increase in the repo rate, which had left many borrowers facing negative amortisation scenarios.
By mandating fixed interest rate options, the RBI seeks to provide borrowers with more stability and control over their loan repayments during periods of interest rate volatility.
(KNN Bureau)
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