Why in news?
The RBI has introduced new loan rules including several important changes aimed at enhancing borrower protection and responsible lending.
 
Key highlights are:

• A Loan-to-Income (LTI) ratio cap at 50%, meaning total EMIs (including new loans) cannot exceed half of the borrower's monthly income, with strict verification of existing debts by lenders.
• Increased risk-based capital requirements for lenders on unsecured personal loans, meaning banks and NBFCs need to hold higher capital against such loans.
• Emphasis on credit score-based loan approval, where loan amounts and interest rates are linked to the borrower's credit score.
• Introduction of the Key Fact Statement (KFS) for every loan, providing complete transparency on interest rates, fees, tenure, and penalties.
• Prohibition of pre-payment or foreclosure charges on floating interest rate loans for individual borrowers from January 1, 2026.
• Faster transmission of lending rate cuts to borrowers by removing a previous 3-year lock-in period on changes to loan spreads. Borrowers can also switch from floating to fixed interest rates at reset.
• Stricter eligibility and documentation requirements to ensure thorough assessment of repayment capacity.

These rules apply to personal loans from banks, NBFCs, digital lending platforms, and microfinance institutions, aiming to protect borrowers from excessive debt and improve transparency in the loan process.

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