The Reserve Bank of India (RBI) on Thursday proposed transparency measures for retail, MSME loan borrowers on additional charges that are levied by banks and non-banking finance companies (NBFCs) on taking a loan. The additional charges include processing fees and documentation charges, which are not mentioned in the basic interest rates.
The central bank said all lending institutions will have to furnish all the charges, like processing fees and documentation charges, that are levied on the interest rate on a loan in the Key Fact Statement (KFS).
As per the RBI's Statement on Developmental and Regulatory Policies, KFS is specifically mandated with respect to loans by commercial banks to individual borrowers, digital lending by RBI-regulated entities (REs), and microfinance loans.
"The Reserve Bank has announced several measures in the recent past to foster greater transparency and disclosure by the regulated entities (REs) in pricing of loans and other charges levied on the customers. One such measure is the requirement for lenders to provide their borrowers a Key Fact Statement (KFS) containing the key information regarding a loan agreement, including all-in-cost of the loan, in simple and easy-to-understand format," the RBI statement said.
Governor Das said providing critical information about the terms of the loan agreement, including all-inclusive interest cost, shall greatly benefit the borrowers in making an informed decision.
The RBI has extended the requirements of Key Fact Statements (KFS) to all retail and MSME loans, Governor Shaktikanta Das said while sharing the policy outcome.
“RBI mandated certain categories of lenders to provide borrowers with key fact statements which provide details of all transactions fees, interest. Requirement of key fact statements extended to cover all retail and MSME loans,” said Das.
"The decision to mandate the provision of the Key Fact Statement for all retail and MSME loans is yet another step towards a more transparent, fair, and customer-centric financial ecosystem. It aids borrowers in making informed decisions, and at the same time, encourages responsible lending practices among financial institutions. The KFS includes all essential details of the loan in a standardised template. This clarity empowers borrowers, enabling them to compare offers from different lenders more effectively and make decisions that best suit their financial situations. With the extension of the KFS mandate to all retail and MSME loans from REs, the RBI has standardised the disclosure of loan terms across the board. This move levels the playing field for all borrowers, regardless of the size of their loan," said Adhil Shetty, CEO & Co-Founder, BankBazaar.
"Today's RBI MPC Meeting introduces the Key Facts Statement for retail and MSME borrowers, enhancing transparency in loan terms. This empowers borrowers with crucial information on interest rates and fees, fostering a conducive lending environment. The proposal for a principal-based authentication framework in digital payments boosts security and promotes digital financial services adoption, particularly benefiting MSMEs. At Biz2X, we acknowledge these initiatives' importance in driving financial inclusion and supporting MSME growth. Meanwhile, the decision to maintain the repo rate at 6.5% reflects cautious economic management amidst uncertainties. With real GDP projected at 7%, we anticipate a positive trajectory for India Inc., remaining committed to supporting growth while navigating economic dynamics," said Rohit Arora, CEO and Co-founder, Biz2Credit and Biz2X.
“As an NBFC adhering to compliance, corporate governance, and taking proactive measures to safeguard the interest of our customers is of prime importance to us, and we welcome this move as it will encourage and enable the borrowers to make informed decisions," said George Alexander Muthoot, MD, Muthoot Finance.
The RBI first introduced banks to issue KFS from April 1, after declaring it in a circular in January 2015. The circular stated: "Banks should provide a clear, concise, one page key fact statement/fact sheet, as per prescribed format, to all individual borrowers at every stage of the loan processing as well as in case of any change in any terms and conditions. The same may also be included as a summary box to be displayed in the credit agreement." Also watch: RBI Issues New Rules For Banks Giving Loans To Individuals, MSMEs
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