In a proactive endeavor to bolster transparency and consumer security in the home loan domain, the Reserve Bank of India (RBI) has unveiled an extensive package of reforms focusing on floating rate home loans. These reforms have been meticulously crafted to shed light on the intricacies of interest rate resets, empower borrowers with the option to embrace fixed interest rates, and preclude banks from modifying loan tenures without due authorization.
The core of the RBI’s reforms revolves around urging banks to institute an unequivocal framework for recalibrating interest rates on floating rate home loans. Entities subject to regulation, including banks, are now mandated to:
- Transparently communicate potential adjustments in loan tenor and Equated Monthly Installments (EMIs) to borrowers.
- Offer borrowers the flexibility to transition from floating to fixed interest rate structures or to even close their loans.
- Provide an open disclosure of all associated charges linked to exercising these choices.
- Facilitate effective communication of crucial information to borrowers.
These measures have been carefully orchestrated to fortify consumer protection and elevate transparency in the lending process.
A pressing concern underscored by the RBI was the unwarranted elongation of loan tenures by lending institutions without seeking requisite consent or engaging in adequate communication with borrowers. Instances where loan tenures were stretched beyond 30 years sans borrower consent prompted this concern. To counteract this issue, the RBI is steering the implementation of a conduct framework for all Regulated Entities.
This framework entails:
- Establishing clear communication channels with borrowers while contemplating tenor or EMI alterations.
- Offering borrowers viable pathways for transitioning to fixed rate loans or closing their loans.
- Ensuring transparency by divulging charges associated with these avenues.
- Ensuring pivotal information is effectively disseminated to borrowers.
While the RBI had previously abolished foreclosure charges and partial prepayment penalties for floating rate home loans, certain ancillary charges borne by borrowers when closing loans persisted. To mitigate this, the RBI now mandates banks to offer unequivocal communication about these charges.
On October 1, 2019, the RBI introduced the external benchmarking system for home loans. This system mandated that all floating rate home loans be tethered to an external benchmark, guaranteeing greater transparency in interest rate determination. Initially, banks were authorized to reset EMIs every quarter.
The benchmarks included: a) RBI’s repo rate, b) Government of India three-month Treasury Bill yield published by Financial Benchmarks India Private Ltd. (FBIL), c) Government of India six-month Treasury Bill yield published by FBIL, and d) Any other benchmark market interest rate published by FBIL.
Within this framework, banks were entitled to levy an interest rate spread over the external benchmark, with the proviso that lending rates should not plunge below the external benchmark rate.