Invest Smart: How RBI's new guidelines can impact your loan EMIs

In a move aimed at promoting responsible lending practices and safeguarding borrowers' interests, the Reserve Bank of India (RBI) has put in place new guidelines.

RBI prohibits levying on penal interest on defaults

Penal interest, often levied by lenders in cases of loan default, is an additional charge imposed on borrowers, over and above the regular interest. The intent behind penal interest has been to encourage borrowers to meet their repayment obligations on time. However, the RBI has recognized that divergent practices in levying penal interest have led to disputes and grievances.

To address this issue, the RBI has issued fresh guidelines that allow lenders to impose penal charges on loan default but prohibit the levying of penal interest. Additionally, the instructions mandate that all lending entities must have board-approved policies for penal charges, ensuring the quantum of charges is reasonable and consistent.

Personal Loans: EMI, Tenor, and Floating Rate Hikes

The RBI's observations have highlighted two key concerns related to personal loans. First, the elongation of tenor and subsequent increases in Equated Monthly Installments (EMIs) have raised borrower grievances due to the lack of proper communication and borrower consent. Second, borrowers with floating interest rates have faced uncertainties in their repayments.

In response, the RBI's instructions require lenders to offer borrowers the option to switch from floating interest rates to fixed rates. Additionally, borrowers now have the choice between opting for an EMI or tenor hike or making a prepayment

Transparency and Communication

Recognizing the importance of transparency in lending practices, the RBI has mandated that lenders share comprehensive details about the principal, interest, and EMI with borrowers on a quarterly basis.

Furthermore, the RBI has stressed that all details related to penal charges, including the quantum and reasons, must be explicitly stated in the loan agreement. Additionally, these details should be included in non-payment reminders to borrowers, ensuring that they are fully aware of the potential consequences of default.