RBI has asked banks to be transparent in resetting the interest rate and EMIs of floating rate home loans under the external benchmark based lending rate mechanism. Moreover the banking regulator has asked the banks to have a more transparent framework in how they price their floating rate interest rate. The central bank has also asked the lender to offer the borrowers under EBLR regime an option to switch to fixed rate home loan whenever they want.
As per the RBI statement: It is proposed to put in place a transparent framework for reset of interest rates on floating interest loans. The framework will require Regulated Entities to (i) clearly communicate with borrowers for resetting the tenor and/or EMI; (ii) provide options for switching to fixed rate loans or foreclosure of loans; (iii) disclose various charges incidental to the exercise of the options; and (iv) ensure proper communication of key information to borrowers. These measures will further strengthen consumer protection.
Proper communication in case of EMI or tenure change
Whenever there is an increase in interest rate the lender usually prefer to increase the tenure of the loan rather than changing the EMI. However, this option sometimes give unreason results. “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,” said the RBI statement.
Some lenders have increased the tenure over 30 years even without the any consent from the borrower. The central bank has taken cognigance of this issue and instructed banks to refrain from doing so. “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 the borrowers. 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 detailed guidelines in this regard shall be issued shortly.
Disclosure of incidental charges in foreclosure of loans
While RBI had mandated earlier that there was no foreclosure charges or partial prepayment penalty to be levied on floating rate home loans however there are many charges which borrowers have to pay which are incidental when foreclosing the loan. Now the apex body has asked the banks to communicate these charges to the borrowers.
The RBI has introduced the external benchmarking system for home loans from October 1, 2019. Under the new external benchmark system, all floating rate based loans were required to be linked to an external benchmark. Initially when external benchmark system was introduced, the RBI allowed banks to reset the EMI once three months.
