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CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

Neha has a floating-rate, EMI-based home loan from a bank. After the external benchmark rate rises, the bank's reset increases the interest rate, which would stretch the loan tenor. Under the RBI's framework on reset of floating interest rates on EMI-based personal loans, what must the bank do?

The bank must clearly inform the borrower of the reset and its effect, and give the choice of a higher EMI, a longer tenor, or a mix of both. Unilateral tenor extension without intimation is not permitted, and a rate reset does not allow recall of the loan.

  1. AExtend the tenor on its own without informing the borrower, as the loan is floating rate
  2. BRaise the EMI only, since tenor can never be changed during the loan
  3. CClose the loan account and demand immediate repayment of the balance
  4. DCommunicate the reset clearly and give the borrower the choice of a higher EMI, a longer tenor, or a combination of bothCorrect

Explanation

RBI requires banks to be transparent when rates reset on EMI-based floating loans. The bank must inform the borrower of the impact on EMI and tenor, and offer options such as enhancing the EMI, extending the tenor or both. Silent unilateral tenor extension breaches this, and no rule makes a rate reset a ground for recall.

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