MUMBAI (Reuters) -The Reserve Bank of India (RBI) on Thursday said it will put in place a framework to ensure greater transparency in resetting interest rates and tenors on floating rate loans, like housing credit.
As policy interest rates rise, lenders pass on the burden to customers by either raising their monthly payments or increasing the tenor of their loan.
The central bank said it found "several" instances of "unreasonable elongation of tenor" of floating rate loans by lenders without proper consent and communication to the borrowers.
"To address the issue, it is proposed to put in place a proper conduct framework to be implemented by all regulated entities to address the issues faced by the borrowers," the RBI said in its Statement on Developmental and Regulatory Policies.
The proposed framework will ensure that lenders clearly communicate any reset in the loan tenor and/or equated monthly installments, provide options of switching to fixed rate loans or foreclosure of loans, the central bank said. Lenders will also be required to ensure that any charges related to these options are disclosed.
Detailed guidelines in this regard will be issued shortly, RBI said.
"While most banks have been following this practice already, it could be that the RBI has found certain lapses in some entities where borrowers' interest was compromised," said a senior official at a private bank, who did not wish to be identified as he is not authorised to speak to the media.
To avoid lapses and create a uniform framework for all banks, the RBI may have proposed this, the banker added.
Ultimately, the move will increase borrower awareness and bring in greater transparency for lending among banks, said Suresh Khatanhar, deputy managing director at IDBI Bank.