- Are you always taken aback when you receive an SMS from your lender about a change in your EMI?
- It feels as if the banks and other financial institutions take unfair advantage of you and charge you without any sort of reasonable explanation.
- Well, it seems that the Reserve Bank of India (RBI) finally understands the gravity of the situation and wants to eliminate these unfair practices.
- If you are someone who has a home loan or an auto loan or even someone who wishes to take a business loan, here is exactly how the RBI’s uniform interest rate proposal will affect you.
- The Two Sides of the Coin India’s lending sector has always had two sides to it.
Are you always taken aback when you receive an SMS from your lender about a change in your EMI? It feels as if the banks and other financial institutions take unfair advantage of you and charge you without any sort of reasonable explanation. Well, it seems that the Reserve Bank of India (RBI) finally understands the gravity of the situation and wants to eliminate these unfair practices.
If you are someone who has a home loan or an auto loan or even someone who wishes to take a business loan, here is exactly how the RBI’s uniform interest rate proposal will affect you.
The Two Sides of the Coin
India’s lending sector has always had two sides to it. On one side, we have the commercial banks, who have had to follow stringent norms for quite some time now. These institutions have had to tie their floating interest rates to external benchmarks (mostly the RBI’s repo rate). These banks have had to automatically reduce their customer’s rates when the repo rate was cut down by the central bank
On the other hand, however, we have the Non-Banking Financial Companies (NBFCs), who have had the freedom to set their rates by using internal benchmarks. They have not been required to disclose these rates to the general public either, leaving their customers in the dark. The RBI, however, proposes a uniform interest rate norm that would cover everyone equally. Whether it is the old commercial banks or the private or popular NBFCs like housing finance companies and gold loan agencies, everyone will be following the same rules.
The Rocket and the Feather
Have you ever wondered why your EMI increases almost immediately when the RBI increases the repo rate but your banks and NBFCs take forever to lower your EMI when the repo rate decreases? Well, this is primarily due to the fact that the NBFCs have had the privilege of setting their internal benchmark without disclosing it to the public.
The RBI proposes that the NBFCs will now have to set a standard timeline, within which their customers’ EMIs will have to be adjusted when there is a change in the external benchmark rate. For instance, the timelines for floating rate loans that are tied to the external benchmark should not exceed 3 months. In the case of internal benchmarks, the timelines should not exceed 12 months. The loan agreement will also have to specify the exact date of the revision. This will ensure that the customers are not kept in the dark and do not have to keep wondering if their EMIs will be adjusted or not.
An Opportunity for MSMEs
This proposed change is not only good news for individuals with personal loans. Small scale businesses and local shopkeepers might finally be able to breathe a little easier soon. It has been a known fact for quite some time now that many local business owners are denied loans by the commercial banks and therefore, have to rely on the NBFCs. Since the NBFCs have been using internal benchmarks for their calculations, the local business owners are often kept in the dark about their interest rates, which is quite unfair.
The RBI’s proposal will finally allow the MSMEs and local business owners to predict their monthly expenditures accurately. Since the NBFCs will now be using external benchmarks, small business owners from the unorganized sector can take advantage of this and apply for loans without having to worry about surprise changes in the interest rates. This will ultimately allow them to plan their budgets better and have a more stable income.
Comparing Apples to Apples
The new rules will allow the borrowers to compare the loan offers from various NBFCs. It will also allow them to see whether a loan offer from an NBFC is really worth it or not. The most important part is that the borrowers can also compare the loan offers from the traditional commercial banks and the NBFCs and ensure that they end up making a well-informed decision.
Ultimately, it would seem that the RBI has finally taken action to help the borrowers. This move will definitely allow more transparency on the part of the financial institutions. Although the new rules will definitely take time to implement fully, the unpredictable hikes and drops on the interest rates have now finally met an end.