Latest Floating Rate Reset Rules on Loans
In a welcome move, the RBI has recently come up with latest floating rate reset rules (2023) on loans. By December 31, 2023, these new standards will apply to all existing and new EMI-based floating rate loans taken by individuals. Type of Loans
The above instructions are applicable to all EMI based floating interest rate retail loans taken by individuals.
The fixed rate loans do not come under the purview of the above circular.
The notification does not take into account loans for bullet repayment. These new rules apply to home loans, loans against property, auto loans, microfinance loans, digital loans, and education loans with floating rates. What Kind of Financial Institution The following financial institutions must adhere to these new regulations: All Scheduled Commercial Banks
Rural and regional banks Primary Cooperative Banks in the City State Co-operative Banks and District Central Co-operative Banks
Financial institutions other than banks (NBFCs) Housing Finance Companies (HFCs)
Effect on Eligibility for a Loan As per the new rules, the lending institutions has to assess the repayment capacity of the borrowers while sanctioning the loans. This indicates that lenders should ensure that there is sufficient headroom or margin for the elongation of the tenor and/or increase in the EMI, even if there are significant future increases in lending rates. Given this kind of criteria, the lenders may sanction loans under tight underwriting conditions and there is a high possibility that the bankers will either sanction the loan at a higher margin or reduce the loan eligibility amount.
Possibility to select Fixed Rate During the interest rate reset, you are now permitted to switch to fixed interest rates if you have a loan with a floating rate. You will now be informed by your lender of the number of times you are permitted to make such changes during the term of the loan. But do keep in mind that the interest rates on fixed rate loans are higher than the floating rate loans. Also, when interest rates fall, you do not get the benefit of rate reductions.
