Newsinc24 Team 
The Reserve Bank has asked banks to provide fixed interest rate option to individual borrowers and directed the lenders to levy only reasonable penalty charges in case of default in EMI payments. The two decisions are expected to provide a relief to the borrowers amid rising interest rates and most of the retail loans being on floating rates now. In a directive to banks and NBFCs, including housing finance companies, the Reserve Bank of India (RBI) on Friday said that several consumer grievances have been received in relation to elongation of loan tenor or increase in EMI amount with regard to EMI-based floating rate personal loans, without proper communication or consent of the borrowers. Interest rates have risen since May last year as the central bank hiked the repo rate to tame high inflation.
“At the time of reset of interest rates, REs (Regulated Entities) shall provide the option to the borrowers to switch over to a fixed rate as per their board approved policy,” as per the notification on ‘Reset of Floating Interest Rate on EMI based Personal Loans’. The policy, inter alia, should also specify the number of times a borrower will be allowed to switch the interest rate system during the tenor of the loan, the RBI said. At the time of sanction, the central bank said REs should clearly communicate to the borrowers about the possible impact of change in benchmark interest rate on the loan leading to changes in EMI and/or tenor or both.
In a notification on ‘Fair Lending Practice – Penal Charges in Loan Accounts’, the RBI said it has been observed that many REs use penal rates of interest, over and above the applicable interest rates, in case of defaults/ non-compliance by the borrower with the terms on which credit facilities were sanctioned. The intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest, the central bank noted.
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