RBI's Big Move On Floating & Fixed Loan Rates: Here's What It Means For Borrowers Choice

The Reserve Bank on Thursday said it will come out with a framework allowing borrowers to switch to fixed interest rate from floating interest rate, a move that would provide relief to borrowers of home, auto and other loans reeling under the impact of high interest rate.

Unveiling the bi-monthly monetary policy, Reserve Bank Governor Shaktikanta Das said under the framework, to be put in place shortly, the lenders will have to clearly communicate with the borrowers about tenor and EMI.

Also Read: RBI MPC Decision: Is There Any Impact On Home Loan EMIs? What Borrowers Must Know

“The supervisory reviews undertaken by the Reserve Bank and the feedback and references from members of public have revealed several instances of unreasonable elongation of tenor of floating rate loans by lenders without proper consent and communication to the borrowers,” Das added.

To address the issue, it is proposed to put in place a proper conduct framework to be implemented by all Regulated entities to address the issues faced by borrowers, Das said.

“The framework envisages that lenders should clearly communicate with the borrowers for resetting the tenor and/or EMI, provide options of switching to fixed rate loans or foreclosure of loans, transparent disclosure of various charges incidental to the exercise of these options, and proper communication of key information to the borrowers,” Das said.

The detailed guidelines in this regard would be issued shortly, Das said.

Reacting on this latest move, Shivaji Thapliyal, head of research and lead analyst, Yes Securities, said, “It may be noted that banks have the option of linking externally benchmarked loans to benchmarks set by the FBIL (Financial Benchmarks India Pvt Ltd) but the same have not been utilised as much as the repo rate or t-bill rate. It remains to be seen whether the aforementioned revision of regulations will lead to greater acceptance of FBIL benchmarks from banks.”

“The RBI would likely have received complaints from borrowers with regard to resetting of interest rates for floating rate loans, especially externally benchmarked loans. These resetting of floating rates serve to rein in potential malpractices on the part of banks. In practice, however, most of the interest rate re-setting, especially on repo-rate linked loans, is already complete,” Thapliyal added.