The Reserve Bank Of India has mandated that all banks and financial institutions furnish borrowers with a comprehensive key facts statement, starting from October 1, in an effort to increase lending practices’ transparency. Along with the standard loan data, this statement will provide information on all fees and the annual cost of credit. The statement must also include information regarding the policy regarding recovery agents, the contact details for grievance resolution, and the possibility of the loan being transferred to other organisations.
According to RBI circular, “Regulated entities shall establish the necessary systems and procedures to adhere to the aforementioned guidelines promptly. In any event, all new retail and MSME term loans sanctioned on or after Oct 1, 2024, including fresh loans to existing customers, must adhere to these guidelines fully and without exception.”
The RBI highlights that the goal of these changes is to give borrowers a clear knowledge of their loan terms so they may make wise financial decisions. No matter whether financial institution provides the loan, these rules will be universally applicable to all kinds of loans for individuals and small businesses.
The inclusion of the annual percentage rate (APR) for the first time is a noteworthy change to the data supplied. This includes the annual cost of credit that the borrower bears, which includes the interest rate and any other applicable fees. According to the RBI, “Charges recovered from borrowers by regulated entities on behalf of third-party service providers on an actual basis, such as insurance and legal charges, shall also be included in the APR and disclosed separately.”
APR will make it easier for aggregators and borrowers to compare the total costs of loans from different lenders.
The RBI has been gradually tightening loan disclosure rules since 2015. The same year, 2022, these rules were further improved for digital lenders as well as microfinance institutions. The RBI declared its intention to implement a requirement for a key facts statement as one of the developmental initiatives that were unveiled in February of this year along with the monetary policy.