RBI calls for transparency in EMI reset, penal levies

Borrowers will soon get to choose whether to pay higher equated monthly instalments (EMIs) or repay their loan over a longer period when banks raise interest rates. They can also expect greater transparency from lenders on penalties if they miss out on repayments.

- Gopika Gopakumar

In the first of two circulars issued on Friday, the Reserve Bank of India (RBI) said banks and non-banks should provide individual borrowers with the option to switch to a fixed rate at the time of resetting interest rates. Lenders should also communicate to borrowers about the possible impact of a change in the benchmark interest rate on the loan leading to changes in EMI and/or tenor or both.

Borrowers should be given a choice to pay a higher EMI or opt for a longer tenure, or a combination of both, and to prepay, either in part or in full, at any point during a loan tenure, RBI said. The rules will take effect on 31 December.

The guidelines come amid consumer grievances related to the lengthening of loan tenures and the increase in EMI on floating-rate personal loans amid rising interest rates.