Floating rate loans, Why RBI wants proper lending conduct by banks (GS Paper 3, Economy)
Why in news?
- The Reserve Bank of India (RBI) has decided to stop the rampant elongation of the tenor of floating rate loans and resetting of the tenor by banks without informing borrowers.
- The RBI announced that it will bring a framework of transparency and proper rules while resetting equated monthly instalments- (EMI-) based floating rate loans.
Why the decision?
- Supervisory reviews by the central bank, and feedback and references from the public have revealed several instances of unreasonable elongation of tenor of floating rate loans by lenders without proper communication and consent from borrowers.
- Banks can change the interest rate by changing the internal benchmark rate and the spread during the term of the loan, potentially harming borrowers’ interests and impairing monetary transmission.
- Borrowers have complained that banks change or reset EMIs arbitrarily, and extend tenors without informing them.
- Borrowers are also not informed about foreclosure charges. The RBI has also observed that unduly long elongation of tenors has camouflaged stress in banks. The borrower can in theory refinance the floating rate loan by going to another bank, but this does not work well in practice.
Framework planned by the RBI:
- A proper conduct framework will have to be implemented by all regulated entities (including banks and non-banking financial companies) to address issues faced by borrowers.
- The framework envisages that lenders should communicate clearly with borrowers on resetting the tenor and/ or EMI, provide options of switching to fixed rate loans or foreclosure of loans, make transparent disclosure of various charges incidental to the exercise of these options, and properly communicate key information to borrowers.
- Banks increase the tenor of the loan when interest rates go up in the floating rate system. Sometimes this is done to maintain EMIs at the same level. However, many banks have been extending tenors and raising EMIs without informing the borrower.
And what do the banks say?
- According to banks, when an external benchmark rate is adopted for fixing the lending rate, the reset period should be linked to the tenor of the underlying external benchmark.
- While longer reset periods increase transmission lags, shorter resets increase interest rate risk for banks.
- Banks have indicated that retail customers would resist a shorter (quarterly) reset, particularly in a rising interest rate cycle, because of the increase in EMIs or longer repayment period with uniform EMIs. Conversely, in a falling interest rate regime, borrowers prefer shorter resets.
Centre releases additional guidelines for Health and Wellness Celebrities, Influencers and Virtual Influencers
(GS Paper 2, Health)
Why in news?
- The Department of Consumer Affairs, under the Ministry of Consumer Affairs, Food and Public Distribution, has released Additional Guidelines for celebrities, influencers and virtual influencers in the field of health and wellness.
Details:
- These guidelines are an important extension to the Guidelines for Prevention of Misleading Advertisements and Endorsements for Misleading Advertisements, 2022, and in lieu of the "Endorsement Know-hows!" guide booklet released on in January 2023.
- They have been developed after detailed discussions with all stakeholders including Ministry of Health, Ministry of Ayush, Food Safety and Standards Authority of India (FSSAI) and Advertising Standards Council of India (ASCI).
- They aim to deal with misleading advertisements, unsubstantiated claims and ensure transparency in health and wellness endorsements.
Key Highlights:
- Under the guidelines, certified medical practitioners and health & fitness experts holding certifications from recognized institutions when sharing information, promoting products or services or making any health-related claims, must disclose that they are certified health/fitness experts and medical practitioners.
- Celebrities, influencers and virtual influencers presenting themselves as health experts or medical practitioners, when sharing information, promoting products or services or making any health-related claims, must provide clear disclaimers, ensuring the audience understands that their endorsements should not be seen as a substitute for professional medical advice, diagnosis or treatment.
- This disclosure or disclaimer is necessary when talking or making claims on topics such as health advantages including those derived from food items & nutraceuticals, disease prevention, treatment or cure, medical conditions, recovery methodologies or immunity boosting, etc.
- This disclosure or disclaimer should be displayed during endorsements, promotions, or at any instance of making health-related assertions.
Way Forward:
- DoCA will actively monitor and enforce these guidelines. Violations may lead to penalties under the Consumer Protection Act 2019 and other relevant provisions of the law.
- The department is committed to safeguarding consumer interests and promoting a fair and transparent marketplace, especially in the increasingly influential digital space. This guideline will further strengthen the industry and protect consumer interests.
