RBI issues new rules for Floating Interest Rate on Loans

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The Reserve Bank of India (RBI) recently announced plans to establish a transparent framework for adjusting interest rates on floating-interest loans, such as home loans. The announcement was made by RBI Governor Shaktikanta Das during the central bank’s bi-monthly monetary policy meeting on Thursday.

According to RBI’s ‘Developmental and Regulatory Policies’ statement, all regulated entities will implement a proper conduct framework to address borrower issues. Detailed guidelines for this framework will be issued soon.

RBI New Rules

To enhance consumer protection, the central bank is establishing a framework that requires banks to communicate any adjustments to loan tenor or EMIs well in advance. Additionally, RBI mandates lenders to provide borrowers with the option to switch to fixed-rate loans or foreclose loans at their discretion.Banks must disclose associated charges with these options upfront, empowering borrowers to make well-informed decisions about their home loan repayments.

In a floating-rate home loan, the interest rate fluctuates throughout the loan tenure based on market dynamics and a benchmark rate. Borrowers typically choose this option if they anticipate future interest rate reductions.

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Fixed and Floating Interest Rate

Indian banks can offer both fixed and floating-rate loans. The computation of floating rates follows an objective and transparent methodology that is agreeable to all parties. The base rate or external market benchmark serves as the reference for floating rate loan products.

Historically, the RBI has increased repo rates to curb inflation, leading to higher floating rates and subsequently larger EMIs for borrowers. Some banks, however, have elongated loan tenures without informing borrowers, rather than increasing EMIs.

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