Personal loan EMI: Now you can switch from floating interest rate to fixed as RBI clarifies norms

The Reserve Bank of India (RBI) recently released a set of Frequently Asked Questions (FAQs) regarding a circular on resetting floating interest rates on Equated Monthly Instalment (EMI)-based personal loans.

One of the highlights of the circular is that banks must give borrowers the option to switch the interest rate from floating to fixed at the time of resetting interest rates for personal loans.

For example, imagine that Mr X has taken out a personal loan at an 11 per cent floating rate. After six months, if the bank proposes to raise the interest to 12 per cent, it must ask Mr X whether he wants to switch to a fixed rate for future loan EMIs.

“REs (banks) have to mandatorily offer fixed interest rate product in all equated instalment-based personal loan categories,” reads the circular.

Besides, banks are also supposed to give borrowers (who had earlier opted for a floating interest rate) the option to switch to a fixed rate at the time of interest rate reset. When the EMIs are set to increase due to a rising interest rate cycle, it is necessary for the banks to give the borrower all the options.

These options are as follows:

1. Longer tenure or higher EMI: The borrower can opt to raise the EMI amount or increase the loan tenure, thus keeping the EMI unchanged or a combination of both options.

2. Switch to a fixed rate: The second option that the bank must give to the borrower is to allow him to switch to a fixed interest rate for the remaining period.

3. Prepay the loan: The third option the borrower can choose is to prepay either in part or in full at any point during the loan tenure.

The central bank circular also categorically states that it covers all EMI-based personal loans regardless of whether they are linked to an external or internal benchmark.

Additionally, these provisions apply to both existing as well as new loan applications, explained RBI.

Additional costs

However, the RBI has made it clear that the bank can levy applicable charges for switching loans from floating to fixed rate or vice versa and any other service charges/administrative costs incidental to the exercise of the switchover.

These costs are supposed to be disclosed in the sanction letter and at the time of revision of such costs by the bank.