Loan borrowers take note! Now, know all-inclusive interest cost for your loan, RBI announces new measures - all about Key Fact Statement

Reserve Bank of India (RBI) governor Shaktikanta Das on Thursday announced that the central bank is looking to issue new rules aimed at customer centricity on loans. According to Das, the new rules will help small borrowers. Small borrowers have to pay processing fee, documentation fee etc, and it is important for the customers to have a clear idea of the actual annualised interest rate that they have to pay. "The customer knows that the loan carries an interest of so much percentage. But there are other changes and fees etc. which he pays upfront. Now that also needs to be loaded into the actual interest rate so that the customer has a clear idea that what is the actual annualised interest rate that he pays," Shaktikanta Das said.For this the Key Fact Statement (KFS) must include such details for greater transparency for the borrowers, the RBI governor said. The need for a KFS is being extended to all retail and MSME loans, which in turn will bring transparency in lending, he said."To enhance transparency in disclosure of such information on various charges, fees etc, the Reserve Bank of India had mandated crayon category of lenders to provide the borrower a Key Fact Statement containing essential information such as all inclusive annual percentage rate and also details of the recovery and grievance redressal mechanism. The requirement of the KFS is now being extended to cover all retail and MSME loans.This measure will lead to enhanced transparency in lending and will enable customers in making informed decisions," he said.Below is the full statement on what the RBI governor said:"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.Currently KFS is specifically mandated in respect of loans by scheduled commercial banks to individual borrowers; digital lending by REs; and microfinance loans. Now, it has been decided to mandate all REs to provide the ‘Key Fact Statement’ (KFS) to the borrowers for all retail and MSME loans. 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," he said.Atul Monga - CEO & Co-founder, BASIC Home Loan says the RBI move will provide several benefits to borrowers, both existing and new. “Firstly, there will be improved transparency. Borrowers will receive upfront and transparent information regarding all fees associated with their loans. This eradicates any hidden charges and allows for easier comparison between different loan options,” he tells TOI.“Secondly, by gaining detailed insights into the costs, terms, and conditions of loans, borrowers can make more informed decisions. Having a clear understanding of all the costs involved from the beginning will assist borrowers in better financial planning and budgeting for loan repayment. Also, the transparency in loan terms could potentially foster competition among lenders, resulting in more favorable terms and lower costs for borrowers.Further, this initiative guards against potential misleading practices, ensuring borrowers have full knowledge of the financial commitment they are entering into,” he adds.Vivek Iyer, Partner, Grant Thornton Bharat says, issuing key facts statements for borrowers will help them have complete information on their loan in terms of the amount of the loan, interest rate, interest type, details of collateral and all types of fees chargeable to them as customers across the loan life cycle. In fact, the RBI has specified a format of the same in its guidelines dated January 2015. According to Atul Monga, the KFS will outline applicable interest rates and how it is calculated and implemented. It will also disclose all fees and charges associated with the loan, including processing fees, prepayment charges, late payment penalties, and any other relevant charges. Additionally, the KFS will clearly state the key terms and conditions of the loan.Other relevant details pertaining to the loan such as maximum or minimum limit, repayment structure, frequency of payments, collaterals (if any), mandatory insurance policy associated with loan (if any) will also be outlined in the KFS.Vivek Iyer states that KFS is nothing but a simple disclosure document capturing all the financial parameters of their borrowing position such as interest, fees, EMI, amount of loan, security of loan, type of loan etc. A total of 10 aspects are required to be disclosed as per the RBI format on KFS.