MUMBAI: The Reserve Bank of India (RBI) has recently mandated all lenders, including fintechs, to disclose all retail and small business loan details in simple format and lucid language effective October 1 2024, by notifying the key fact statement (KFS) issued on April 15.
The KFS guidelines are an important step towards protecting both retail as well as small business borrowers, and it mandates lenders to provide comprehensive loan agreement details in clear and transparent language and details of all the charges on the borrower including those charged by the lender on behalf of third-party service providers apart from details of recovery agents. The KFS also has to provide contact details for grievance resolution, and the possibility of the loan being transferred to other organisations.
Empowering borrowers
The monetary authority feels KFS will empower borrowers to make smart choices with their money as the new rules will apply to all types of loans for individuals and small businesses, irrespective of the type of lenders.
The new norms are applicable to all commercial banks, housing finance companies, non-bank lenders, cooperative banks and fintechs who are more into co-lending practices, which has the biggest grey areas. They are also applicable to small finance banks, local area banks, regional rural banks, urban co-operative banks, and state & central co-operative banks. The only excluded entities are payments banks and credit card receivables.
The immediate trigger for the KFS notification is the latest Ombudsman report (released on March 11, 2024) which has found many hanky-panky deals by loan apps and also by co-lending entities where most of the loan pricing details are missing.
Full disclosure of loan charges
The biggest transparency tool in the KFS is the annual percentage rate (APR), which is the annual cost of the loan on the borrower, including all other charges. The APR also mandates disclosure of all charges recovered from the borrower by the lender on behalf of third-party service providers such as insurance and legal charges, disclosed separately.
In all cases wherever the lender is involved in recovering such charges, the receipts and related documents shall be provided to the borrower for each payment, within a reasonable time. Any fees, charges, etc. which are not mentioned in the KFS, cannot be charged by the lender to the borrower at any stage during the term of the loan, without explicit consent of the borrower. The other benefits of the APR include borrowers and even aggregators being able to compare the all-in cost of loan from various lenders.
In fact, the APR was notified in January 2015 in the circular on ‘display of information by banks’ and in September 2022 on the ‘guidelines on digital lending’. But most lenders did not go ahead as there was no RBI deadline.
The RBI has been driving loan pricing transparency as it has found that retail borrowers have been subsidising large borrowers who were getting loans at much lower rates than the former as they have better bargaining power. The RBI found this to be against customer interest.
And with the repo-linked lending rate, no bank can lend below the publicly disclosed lending rate which is a 2-3% above the repo rate to any small or big borrower.
Currently, lenders mostly disclose just the interest rate and processing fee, and not other charges which could be legal charges and property verification fees among others in case of a home loan. In case of personal loans, which are disbursed without much verification checks, normally only the EMI is disclosed and other costs such as processing fee and others are normally hidden. But all these would be a thing of the past from October.
More disclosures
Another key fact is the equated periodic instalment (EPI/EMI), which is an equated or fixed amount of repayments, consisting of both the principal and interest components, to be paid by the borrower towards repayment of a loan at periodic intervals for a fixed number of such intervals; and which result in complete amortisation of the loan.
The March 11 Ombudsman report, in its ‘root cause analysis’ of major areas of customer complaints, has found the following as the main complaints: a) unauthorised/ fraudulent digital transactions due to lack of robust fraud prevention mechanisms in lenders and customers divulging sensitive information; b) inordinate delays in reversal of failed transactions due to lack of daily reconciliation by lenders; c) poor communication from lenders especially digital lenders on loan terms and conditions like applicable interest rate, foreclosure and other charges; d) levying charges on non-maintenance of minimum balance in deposit accounts due to gap in banks’ policy; e) cross selling/mis-selling due to information asymmetry between customers and lenders; f) inordinate delays in reporting updated credit information to credit information bureaux resulting in wrong credit reports; and g) lender’s failure to sensitize its recovery agents regarding extant regulatory guidelines on recovery operations.
The KFS is aimed at harmonising disclosure norms for all into one document so as to enhance transparency and reduce information asymmetry on financial products being offered by different regulated entities, thereby empowering borrowers to make an informed financial decision. Financial literacy still remains much to be desired but financial needs are rapidly rising.