Reshaping Borrowing Dynamics: RBI's New Regulations Impacting Loan Eligibility and EMIs in India
In response to the recent loan regulations set forth by the Reserve Bank of India (RBI), a notable shift in borrower eligibility and loan terms is anticipated. As interest rates continue to rise, banks and financial institutions might witness a decline in borrowers' loan eligibility. This, in turn, could prompt them to revise Equated Monthly Installments (EMIs) for specific home loan categories. A significant implication of these changes is the requirement for banks to offer borrowers the option of transitioning to fixed-rate loans during the interest rate reset phase.
Under the new directives, loan sanction letters must incorporate clear information about the potential costs involved in switching from a floating to a fixed interest rate in the future. Lenders are now tasked with ensuring that even in the face of substantial interest rate hikes, EMIs will still be sufficient to cover monthly interest payments. This provision is designed to prevent any escalation in the outstanding loan balance from the previous month after the EMI is paid.
The RBI's recent circular addressing the reset of floating interest rates for EMI-based personal loans emphasizes that lenders should not merely assess borrowers' repayment capacity based solely on prevailing interest rates. Instead, they are urged to factor in a cushion to safeguard borrowers' ability to meet payment obligations, even if interest rates experience an upward trajectory.
In the past, the volatility of interest rates has resulted in fluctuations of up to six percentage points within a single loan cycle. Consequently, the burden of interest increased substantially, often causing loan tenures to extend by several years. Lenders, at times, refrained from adjusting EMIs to prevent the extension of the EMI duration, which would, in turn, boost their interest earnings.
The new regulations demand that lenders evaluate borrowers' repayment capacity at a rate higher than the current prevailing one. This adjustment is aimed at ensuring that borrowers can cope with potential interest rate hikes without undue financial strain.
At present, banks typically determine borrowers' repayment capability based on prevailing interest rates. For instance, an individual with 20 years until retirement might find themselves capable of managing an EMI of Rs 74,557 for a Rs 1 crore loan at a 6.5% interest rate. However, when the interest rate rises to 11%, their affordability might dwindle to Rs 72 lakh.
A notable observation is that most banks presently refrain from offering fixed-rate loans due to their short-term deposit structures. A senior banker shared that if compelled to provide fixed rates, banks might incorporate an adequate markup to mitigate the risks associated with fluctuating interest rates.
RBI Governor Shaktikanta Das recently announced that the central bank would review EMI norms to address concerns regarding banks significantly extending home loan tenures following interest rate hikes. He stressed that banks should assess appropriate loan tenures by considering borrowers' payment capacities, incorporating age-related factors into their evaluations.
Effective as of December 31, 2023, the new rules apply to both new and existing borrowers. They aim to enhance transparency in the lending process by mandating the disclosure of crucial information to borrowers. This includes details about the principal and interest recovered to date, the number of remaining EMIs, the amounts of EMIs, and the annualized rate of interest or Annual Percentage Rate (APR) for the entire loan duration. These provisions contribute to a more informed borrowing experience for individuals seeking financial assistance