How RBI Is Planning To Make Your Home Loan EMIs More Transparent

At a time when home loan borrowers are stressed with their home loan EMIs climbing up amid rising interest rates, India¡¯s central bank, the RBI, has come forward with some significant announcements that can provide relief to borrowers.

RBI's Steps To Make Home Loans More Transparent

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The Reserve Bank of India (RBI) has asked the banks to be transparent in resetting the interest rate and EMIs of floating-rate home loans under the external benchmark-based lending rate (EBLR) mechanism.

Moreover, the RBI has asked the banks to have a more transparent framework in how they price their floating rate interest rate. The central bank has also asked the lender to offer the borrowers under the EBLR regime the option to switch to a fixed-rate home loan whenever they want, at a time when borrowers who are serving floating-rate home loans are seeing their EMIs climb up.

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RBI Governor's Statement On Home Loans

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It is proposed to put in place a transparent framework for the reset of interest rates on floating-interest loans. The framework will require regulated entities to (i) clearly communicate with borrowers for resetting the tenor and/or EMI; (ii) provide options for switching to fixed rate loans or foreclosure of loans; (iii) disclose various charges incidental to the exercise of the options; and (iv) ensure proper communication of key information to borrowers.

These measures will further strengthen consumer protection, as per the RBI governor¡¯s statement.

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Proper communication in case of EMI or tenure change

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Whenever there is an increase in interest rates, the lender usually prefers to increase the tenure of the loan rather than changing the EMI. However, this option sometimes gives unreasonable results.

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

Some lenders have increased the tenure to over 30 years even without any consent from the borrower. The central bank has taken cognizance of this issue and instructed banks to refrain from doing so. "To address the issue, it is proposed to put in place a proper conduct framework to be implemented by all Regulated Entities to address the issues faced by the 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, provide transparent disclosure of various charges incidental to the exercise of these options, and provide proper communication of key information to the borrowers. Detailed guidelines in this regard shall be issued shortly," said the RBI in its announcement.

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Disclosure of incidental charges in foreclosure of loans

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While the RBI had mandated earlier that there were no foreclosure charges or partial prepayment penalties to be levied on floating-rate home loans, there are many charges that borrowers have to pay that are incidental to foreclosing the loan. Now the central bank has asked the banks to communicate these charges to the borrowers.

The RBI has introduced the external benchmarking system for home loans as of October 1, 2019. Under the new external benchmark system, all floating rate based loans were required to be linked to an external benchmark. Initially, when the external benchmark system was introduced, the RBI allowed banks to reset the EMI once every three months. There are four external benchmarks that were introduced by the RBI while announcing the new home loan regime.

These are as follows: RBI's repo rate; the Government of India's three-month Treasury Bill yield published by the Financial Benchmarks India Private Ltd. (FBIL); the Government of India's six-month Treasury Bill yield published by the FBIL; and any other benchmark market interest rate published by the FBIL.

Among these, the repo rate is the most commonly adopted one by banks for offering home loans.

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