What changed
RBI now requires lenders to offer borrowers a choice at floating rate resets: increase EMI, extend tenor, or both. Lenders may also provide an option to switch to a fixed rate as per board policy. All charges must be disclosed upfront, and quarterly statements with key loan details must be shared.
What it means for you
Banks and NBFCs must overhaul their loan sanction and reset processes to include clear borrower consent and option menus. This reduces the risk of unilateral tenor elongation or EMI hikes that trigger complaints. Lenders need to update IT systems to track resets and generate quarterly statements, increasing operational costs but improving customer trust.
What you must do
- Update loan sanction letters to clearly explain impact of benchmark changes on EMI/tenor.
- Implement a process to offer borrowers a choice at each reset: increase EMI, extend tenor, or both.
- Provide an option to switch to fixed rate as per board-approved policy and disclose all charges.
- Ensure quarterly statements are sent to borrowers showing principal, interest, EMI, remaining EMIs, and APR.
- Review IT systems to prevent negative amortisation and enable transparent communication of reset options.
Who it affects
All Scheduled Commercial Banks, Regional Rural Banks, Primary (Urban) Co-operative Banks, State and District Central Co-operative Banks, Non-Banking Financial Companies (including Housing Finance Companies)
Does this apply only to personal loans or other floating rate loans too?
The circular specifically covers EMI-based floating rate personal loans, but instructions apply mutatis mutandis to all equated instalment loans of different periodicities.
Can lenders still increase EMI without borrower consent?
No. At each reset, lenders must give borrowers a choice to increase EMI, extend tenor, or both. Unilateral changes without proper communication are not allowed.
What happens if a borrower wants to prepay after a reset?
Borrowers can prepay in part or full at any time. Foreclosure charges or prepayment penalties are subject to existing RBI instructions.