Banks Should Show Greater Transparency in Resetting Interest Rates on Loan EMIs: RBI
Moneylife Digital Team 10 August 2023
Reserve Bank of India (RBI) has decided to put in place a proper conduct framework to be implemented by all regulated entities (REs) to address issues faced by the borrowers, especially about interest rate reset on equated monthly instalments (EMI) for floating interest loans. Moneylife Foundation has been relentlessly campaigning against arbitrary and opaque bank policies concerning floating rate loans and filed a public interest litigation (PIL) in the Supreme Court.  
RBI says its supervisory reviews 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. 
"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," it added.
RBI says it will issue detailed guidelines in this regard shortly.
Regular readers would know Moneylife Foundation has been relentlessly campaigning against arbitrary and opaque bank policies with respect to floating rate loans and filed the PIL. Borrowers, who have taken loans on a floating rate basis, suffer an immediate increase when interest rates are hiked by the RBI but do not get much relief when rates go down. This makes a mockery of the very concept of 'floating' rates. We have highlighted this issue in several articles and our Cover Story "Banksters"
In August 2019, finance minister Nirmala Sitharaman informed that banks have decided to launch repo rate or external benchmarking-linked loan products which will reduce EMIs on housing loans, auto and other retail loans. (Read: Banks to Pass on MCLR Rate Cuts to Borrowers & Launch External Benchmark Lined Loan Products: FM
In December 2018, RBI directed all banks to adopt a new external benchmark for providing loans for home, auto and micro and small enterprises (MSME) from 1 April 2019. RBI also asked banks to keep fixed their spread over the benchmark rate throughout the tenure of the loan. (Read: Moneylife Impact: RBI Asks Banks To Use External Benchmark for Floating Rates from Next Year but What about the Past?)
RBI's decision in December 2018 was based on the recommendation by the Dr Janak Raj committee. The committee, in its 2017 report "Internal Study Group to Review the Working of the MCLR System", had provided a shocking account of how wide and deep banking malpractices are with regard to floating rate loans. It confirmed every one of our arguments about how banks cheat customers, fudge rates and extort conversion charges.
At that time, Moneylife Foundation wrote to Dr Urjit Patel, the then governor of RBI, requesting to direct banks to calculate the excess interest they have charged (through arbitrary and ad hoc calculations of base rate or MCLR) and refund the money to borrowers, especially retail borrowers and SMEs. 
"The RBI should also direct banks to set up special helplines to handle complaints from borrowers whom banks have overcharged over the years. We also request the Reserve Bank to immediately issue circular/master directions asking banks and financial institutions to allow existing borrowers to migrate to MCLR or any new system without any conversion fee or any other charges for the switchover," the memorandum had said.
RBI refused to act on it. Moneylife Foundation then had to file a PIL in the Supreme Court.
Kamal Garg
11 months ago
Floating interest rates work only in one direction i..e increase in the rate whereas downward does not happen or happens with a substantial time lag and that too, with some charges which ultimately destroy the whole purpose of having floating rate loans.
11 months ago
Umm...sure? Like banks give two hoots.
11 months ago
When the ring master instructs group of donkeys, to kick the s with transparency. As regulator they fail and play behind the scenes.
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