EMI Calculation Methods

Reserve Bank of India (RBI) has issued guidelines on ‘Fair Practice Code for Lenders’ which are required to be framed by Banks/Financial Institutions/Non Banking Financial Companies (NBFCs) duly adopted by their respective Boards. These guidelines which are revised periodically, inter-alia, stipulate that loan application forms in respect of all categories of loans irrespective of the amount of loan sought by the borrower should be comprehensive. It should include information about the fees/charges, if any, payable for processing, the amount of such fees refundable in the case of non acceptance of application, pre-payment options and any other matter which affects the interest of borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower. Further the banks are advised to inform ‘all-in-cost’ to the customer to enable him to compare the rates charged with other sources of finance.

In terms of RBI guidelines dated July 1, 2009 on ‘Loan and Advances’ – Statutory and other Restrictions’, the lender should convey to the borrower, among other things, the terms and conditions and other caveats governing credit facilities, in written and duly certified by the authorised official. A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement should be invariably furnished to all the borrowers at the time of sanction/disbursement of loans.’

Further, Banks/Financial Institutions/NBFCs adopt an interest rate model taking into account relevant factors such as, cost of funds, margin and risk premium etc. and determine the rate of interest to be charged for loans and advances.

This information was given by Minister of State for Finance, Shri Namo Narain Meena in written reply to a question raised in Rajya Sabha today.