The Reserve Bank of India (RBI) has come out with a circular on FAQs clarifying doubts regarding resetting of floating interest rates on personal loans with equated monthly installments (EMIs). The FAQs, issued on January 10, will improve transparency, give borrowers more control, and bring more clarity to how lending institutions operate.
It is important to note that this circular applies exclusively to EMI-based personal loans and does not extend to other types of loans, such as business or commercial loans. Personal loans, as defined in the RBI’s earlier circular dated January 4, 2018, are covered under this provision. Let’s understand which categories of loans fall under personal loans as per the RBI definition.
What is a personal loan as per RBI?
As per the RBI’s circular dated January 4, 2018, “Personal loans refers to loans given to individuals and consist of (a) consumer credit, (b) education loan, (c) loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), and (d) loans given for investment in financial assets (shares, debentures, etc).”
Also read: Loan Against FD: Should you borrow against your fixed deposit or break it?
What are fixed and floating interest-rate loans?
Fixed interest rate loans, as the name suggests, are loans where the interest rate remains unchanged throughout the loan tenure. This means your EMI (Equated Monthly Installment) will remain constant, which will provide stability in your monthly payments.
A floating interest rate, on the other hand, is an interest rate that fluctuates over time based on changes in a benchmark rate. The Reserve Bank of India (RBI) sets the repo rate, which serves as a key benchmark influencing floating interest rates on home loans.
What do RBI FAQs say about changing a loan from a floating rate to a fixed interest rate and vice versa?
FAQs have made it clear that regulated entities, such as banks, have to provide the loan borrower with the option of switching to/from a fixed rate as per the board-approved policy at the time of interest rate reset.
It is important to note that this RBI circular on FAQs about loan interest rate resetting will apply to the existing borrowers as well.
What does it mean for borrowers?
This means that when the RBI hikes the repo rate,
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