Moneycontrol PRO
you are here: HomeNewsBusiness

RBI’s framework on floating rate loans to protect consumers, say experts

The proposed framework will enable borrowers to make informed decisions on whether to switch between fixed and floating rate regimes when there is a change in the interest rate

August 11, 2023 / 03:42 PM IST

To protect the interest of bank customers, RBI Governor Shaktikanta Das said on August 10 it was putting in place a transparent framework for resetting of interest rates on floating rate loans.

A framework on floating rate loans proposed by the banking regulator will safeguard the interests of consumers, especially home loan borrowers, by ensuring greater transparency in the way tenures and monthly instalments are changed, said bankers.

The Reserve Bank of India (RBI) said on August 10 it proposed to restrict the “unreasonable elongation” of the tenure of floating rate loans and resetting of the tenor by banks. Lenders will be required to inform borrowers when there is such a change, seek their consent and offer flexibility, said bankers.

A floating interest rate is one that changes based on a benchmark rate or market conditions, unlike a fixed rate, which remains constant through the duration of a loan. Changes in the floating rate of interest usually result in an increase or decrease in the number of equated monthly instalments (EMIs) a borrower pays.

Experts said the RBI’s measure will largely affect home loans, which have long tenures.

“Earlier, the tenure extension used to happen automatically, in line with the change in wider interest rates,” said Virat Diwanji, group president and head consumer bank at Kotak Mahindra Bank. "Now, banks will work on informing customers and taking their consent on this.”

Jahnavi Prabhakar, economist at Bank of Baroda, said the central bank’s proposal will lead to more customer flexibility.

Also read: Banks to assess interest on floating rates, says Governor Das

“The framework will bring in the option to switch to fixed-rate or foreclosure and provide clarity to borrowers to change or reset the tenor and EMIs,” Prabhakar said.

What is the proposed framework?

To protect the interest of bank customers, RBI Governor Shaktikanta Das said on August 10 it was putting in place a transparent framework for resetting interest rates on floating rate loans.

As per this, lenders must clearly communicate to borrowers when the loan tenure and/or EMIs are reset, provide options to switch to fixed-rate loans or foreclose loans, disclose all charges related to such switches, and communicate all key information to borrowers.

Experts said customers are likely to stay with the floating rate loan regime because rates are expected to come down later in FY24 or in early FY25.

Also read: RBI MPC: Deputy governor asks banks to 'redouble' efforts on loan recovery

“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,” Prabhakar said.

Diwanji said customers will stick to a floating rate model as there is an additional option of balanced rates over the tenure.

The RBI left the benchmark interest rate unchanged at 6.5 percent for the third successive time in the current financial year. The rate was increased from 4 percent in May 2022.

first published: Aug 11, 2023 03:42 pm

Discover the latest business news, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!