RBI to issue norms on loan resets to boost transparency

The Reserve Bank of India (RBI) on Thursday said it would set rules to enhance transparency in interest rate and tenor resets for floating loans, an outcome of home-loan repayment periods being extended to as long as 50 years in certain cases.

After RBI started raising the repo rate in May last year, home-loan borrowers, most of whose loans are pegged to external benchmarks like the repo rate, had to substantially increase their monthly repayments or extend their repayment tenor or a combination of both. As Mint reported in March, these extended loan tenors resulted in certain borrowers being obligated to make payments well into their 70s and 80s.

Through supervisory reviews and feedback from the public, RBI on Thursday said it has come across several instances of unreasonable elongation of the tenor of floating-rate loans without proper consent and communication.

To address this, the regulator intends to put in place a conduct framework for lenders to address issues faced by borrowers. Under the framework, lenders should clearly communicate with the borrowers for resetting the tenor and/or equated monthly instalment (EMI) and provide options for switching to fixed-rate loans or foreclosure of loans. The norms would also call for transparent disclosure of various charges.

Asked how RBI would define a tenor elongation as unreasonable, governor Shaktikanta Das said it is something banks will have to assess, taking into account the payment capacity of the borrower. “Banks will also have to take into consideration the age factor. It will vary from individual to individual. Also, it is necessary to avoid unduly long elongation, which sometimes may, going forward, camouflage an underlying stress in a particular loan,” Das said.

He said it is a commercial decision of individual banks and the regulator would just provide broad guidelines.

Deputy governor Rajeshwar Rao said RBI has already discussed it with chief executives of banks and has conveyed its concerns and what actions the regulator expects them to take.

Experts said the drive to make the process more transparent would certainly benefit borrowers.

“Given the increasing realization of credit, proposals to transparently disclose the implication of interest rate resets in floating-rate loans and corresponding changes in the tenors, and/or the changes in EMI is a welcome move to educate and inform the borrowers as they can better understand the impact of the changes in these terms,” said A.M. Karthik, vice-president, financial sector ratings, Icra Ltd.

Some experts are concerned about the proposal for banks to provide borrowers with an option to switch to fixed-rate loans. A financial sector analyst said that since we are at the peak of the rate cycle and rates are likely to only come down from here, banks could use it to push borrowers to change from floating rate to fixed rate. This would mean that such borrowers would not be able to avail the benefit of a fall in rates whenever that happens, while banks would not see sudden pressure on margins.

Others believe this would not stoke too much of borrower interest, though. “We don’t think there will be much shift to a fixed regime as interest rates are expected to come down though in FY25 and not FY24,” said Jahnavi Prabhakar, an economist at Bank of Baroda.