The Reserve Bank of India (RBI) will issue guidelines to banks and housing finance companies (HFCs) on resetting the tenor and/or equated monthly instalments (EMIs) after it found “several instances of unreasonable elongation” of floating rate tenor by lenders without proper consent or communication to borrowers.
Governor Shaktikanta Das said lenders will have to also take into consideration age and payment capacity before changing loan terms. “It is necessary to avoid an undue long elongation which sometimes may camouflage an underlying stress in a particular loan. Therefore, the extension of the tenor has to be for a particular period,” Governor Das said. The RBI, however, said the guidelines will not define the term of the loan, leaving it to the commercial wisdom of lenders and their boards to assess.
“We are just providing some broad guidelines,” Das said. The announcement came as part of the statement on development and regulatory policies accompanying the monetary policy.
The central bank has proposed to put in place a proper conduct framework to be implemented by all regulated entities under its watch.
“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,” the Reserve Bank of India (RBI) said.
Deputy governor Rajeshwar Rao who is in charge of the department of regulation and enforcement said the central bank has discussed the issues with bank CEOs and has conveyed its concerns on what action it expects them to take.
Bankers said the central bank wants lenders to balance between increasing loan tenors and EMIs of borrowers. “When rates rise banks can either increase EMIs or tenor.
