Borrowers, Take Note: RBI Announces New Measures for Transparent Loan Costs with Key Fact Statements

Borrowers, Take Note: RBI Announces New Measures for Transparent Loan Costs with Key Fact Statements

Reserve Bank of India (RBI) governor Shaktikanta Das announced on Thursday the central bank’s plan to introduce new regulations aimed at prioritizing customer needs in loans. Das emphasized that these new rules are particularly beneficial for small borrowers. Often, small borrowers encounter additional costs like processing fees and documentation fees, making it crucial for them to understand the actual annualized interest rates they will be paying.

“The borrower is aware of the loan’s interest rate percentage, but there are other charges and fees paid upfront. It’s essential to incorporate these into the actual interest rate so that borrowers have a clear understanding of the total annualized interest rate,” stated Shaktikanta Das.

To achieve greater transparency for borrowers, Das highlighted the importance of including such details in Key Fact Statements (KFS). He mentioned that extending the requirement of a KFS to all retail and MSME loans would enhance transparency in lending practices, enabling borrowers to make more informed decisions.

Das further elaborated, “In order to enhance transparency in disclosing information about various charges and fees, the Reserve Bank of India had previously mandated certain categories of lenders to provide borrowers with a Key Fact Statement containing essential information such as the all-inclusive annual percentage rate and details of the recovery and grievance redressal mechanism. Now, this requirement is being extended to cover all retail and MSME loans. This measure will significantly improve transparency in lending and empower customers to make informed decisions.”

According to Atul Monga, CEO & Co-founder of BASIC Home Loan, the RBI’s initiative will offer several benefits to borrowers, both existing and new. “Firstly, it will enhance transparency by providing upfront and clear information about all associated fees, eliminating any hidden charges and facilitating easier comparison between different loan options,” he stated. “Secondly, by providing detailed insights into loan costs, terms, and conditions, borrowers can make more informed decisions, aiding in better financial planning and budgeting for loan repayment. Additionally, transparent loan terms could foster competition among lenders, potentially leading to more favorable terms and lower costs for borrowers.”

Vivek Iyer, Partner at Grant Thornton Bharat, highlighted that issuing Key Fact Statements to borrowers will ensure they have comprehensive information about their loans, including loan amount, interest rates, interest types, collateral details, and all applicable fees throughout the loan duration. He also noted that the RBI has provided a specific format for these statements in its guidelines dating back to January 2015.

The Key Fact Statement (KFS), according to Atul Monga, will cover applicable interest rates, fee structures, repayment terms, collateral details, and any mandatory insurance policies associated with the loan. Vivek Iyer added that the KFS serves as a simple disclosure document capturing various financial parameters of the borrowing, including interest, fees, EMIs, loan amount, security, and loan type, as mandated by RBI guidelines.

Also Read

One thought on “Borrowers, Take Note: RBI Announces New Measures for Transparent Loan Costs with Key Fact Statements”

Leave a Reply

Your email address will not be published. Required fields are marked *