Personal loans: Borrowers must know THESE RBI’s guidelines to get a fair deal from the bank

If you are a personal loan applicant, you are supposed to be aware of the latest guidelines which are in force. Early this year, Reserve Bank of India (RBI) released a circular with regards to equated periodic instalment based personal loans. 

RBI's guidelines on ‘reset of floating interest rate on EMI based personal loans’ mention that banks must disclose annualised rate of interest/ annual percentage rate (APR), as applicable, in the Key Fact Statement (KFS) and the loan agreement.

The banks must also mention the possible impact of change in benchmark interest rate on the loan.

Besides, the RBI also mentioned that any increase in the EMI/tenor on account of the external benchmark rate needs to be communicated.

Besides, quarterly statements need to be provided disclosing the minimum, the principal and interest recovered till date, EMI amount, number of EMIs left and annualised rate of interest for the tenor of the loan.

Rising interest rate

What will happen during the rising interest rate scenario? The RBI's circular clearly mentioned that whenever there is a reset of interest rates for an entire class of borrowers in a particular loan category, due to increase in the reference benchmark; the bank will provide the following options to the borrowers:

A. Either enhancement in EMI or elongation of number of EMIs, keeping the EMI unchanged or a combination of both options;

B. Switch to the fixed interest rate for the remainder of loan tenure; and

C. To prepay the loan, in part or in full, at any point during the loan tenure.

Switch to fixed interest rate

The RBI's circular mentions that the bank must give an option to the borrower to switch to fixed interest rate scenario at the time of reset of interest rates even if the bank does not have fixed interest rate product in its portfolio.

“REs have to mandatorily offer fixed interest rate products in all equated installment based personal loan categories,” the circular reads.

Interestingly, the borrower is allowed to switch back to floating interest rate from fixed rate after once switching from floating.

The circular says that its intent is to allow flexibility to the customer to switch from floating rate loan to fixed rate loan or vice versa. However, this will be subject to applicable charges. “The RE is required to specify the number of times a borrower will be allowed to exercise the switch option during the tenor of the loan under its Board approved policy,” reads the circular.

(Note: Raising a loan comes with its own risks. So, due caution is advised)