In what should come as a good news to borrowers of home and other floating rate loans, the Reserve Bank of India (RBI) on Thursday said that it will soon come out with a framework that will not only bring more transparency on loans that are reset but also provide the option of converting to a fixed rate.

More importantly, the new mechanism will also bring a solution for the "unreasonable elongation of tenor of floating rate loans’’ by banks.

Both these steps are seen as benefiting retail borrowers who have seen the benchmark repo rate being raised by 250 basis points to 6.50 per cent between May 2022-February 2023.

With many borrowers deciding to keep their EMIs unchanged, it has resulted in their tenor shooting up due to the rate increase.

Announcing the monetary policy, Reserve Bank of India (RBI) Governor Shaktikanta Das said that under the framework, that will be put in place shortly, banks will have to clearly communicate with the borrowers about the loan tenor and the EMI.

“The supervisory reviews undertaken by the Reserve Bank and the feedback and references from members of public have revealed several instances of unreasonable elongation of tenor of floating rate loans by lenders without proper consent and communication to the borrowers,” RBI said.

It is now planning to put in place a proper conduct framework to be implemented by all regulated entities (banks, NBFCs, small finance banks) to address the problems faced by borrowers.

“The framework envisages that lenders should clearly communicate with the borrowers for resetting the tenor and/or EMI, provide options of switching to fixed rate loans or foreclosure of loans, transparent disclosure of various charges incidental to the exercise of these options, and proper communication of key information to the borrowers,” Das said.

Detailed guidelines in this regard would be issued shortly.

“Given the increasing retailisation of credit, proposals to transparently disclose the implication of interest rate resets in floating rate loans and corresponding changes in the tenors and/or the changes in EMI is a welcome move to educate and inform the borrowers as they can better understand the impact of the changes in these terms while availing loans,” A.M. Karthik, vice-president-financial sector ratings, Icra Ltd, said.

While interacting with the press the RBI governor said that the age of the borrower and the individual’s ability to repay must be considered, while extending loan tenors.