Monetary policy: RBI to prescribe framework to reset floating rate loans

Pulls up banks for ignoring repayment capacity while elongating repayment period

Concerned about loan-repayment periods becoming unreasonably long, the Reserve Bank of India (RBI) will put in place a transparent framework for resetting interest rates on floating-interest loans such as home loans.

The regulator asked banks to define a reasonable period, keeping in mind factors like age and the repayment capacity of borrowers.

Supervisory reviews, feedback, and references from the public have revealed instances of loan repayments becoming unreasonably long and without proper consent from borrowers or communication to them at that, the RBI said.  

All regulated entities will implement a proper conduct framework to address the issues faced by borrowers. Detailed guidelines in this regard will be issued shortly, the RBI said in a statement on “Developmental and Regulatory Policies”.

This statement accompanies the monetary policy review.

Rajeswar Rao, deputy governor, said the regulator had discussed this with chief executives of banks and “we have conveyed our concern and what action we expect them to take”, he said in a post-policy media interaction.

The RBI is not considering defining “unreasonable elongation”. It is something the boards (of banks) will have to consider, with regard to the tenor and the repayment capacity of individual borrowers.

“It is up to the board to decide what a reasonable tenure is. Increasing that beyond a particular period would be deemed unreasonable. It is left to the individual institutions … we will not do it,” Rao added.

In a similar vein, Governor Shaktikanta Das said this was something banks would have to assess, taking into account the payment capacity of the borrower and how long his payment capacity lasted. Banks will also have to take into consideration the age factor.

Also it is necessary to avoid unduly long elongation, which sometimes may camouflage an underlying stress in a particular loan. Therefore, the extension of tenor has to be for a reasonable period.

“We don’t want to define it. It is a commercial decision of banks, which they and their boards will have to assess,” the governor said.

Two senior private-bank executives said the RBI’s message was based largely on instances of mortgage loans, which are essentially long-term. During the rising interest-rate environment, lenders stretched repayment periods rather than increasing equated monthly instalments.