The Reserve Bank of India (RBI) has announced significant changes regarding loan terms, emphasizing transparency and borrower empowerment.
Effective from October 1, banks will be obligated to adhere to the terms outlined in the Key Fact Statement (KFS) if agreed upon by the borrower.
In a statement released, the central bank highlighted the importance of implementing these guidelines promptly, ensuring compliance for all new retail and MSME term loans sanctioned on or after October 1, 2024, without exception.
Here are the key points from the RBI's recent announcement:
Legal Basis of Instructions: These instructions are issued under various sections of the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934, and the National Housing Bank Act, 1987.
Key Facts and KFS: Key Facts are legally significant facts in a loan agreement that assist borrowers in making informed financial decisions.
The Key Facts Statement (KFS) is a statement of key facts provided to the borrower in a standardized format, written in a language understood by the borrower.
Any fees, charges etc. which are not mentioned in the KFS, cannot be charged by the Regulated Entities (REs) to the borrower at any stage during the term of the loan without explicit consent of the borrower.
Annual Percentage Rate (APR) and Equated Periodic Instalment (EPI): APR represents the annual cost of credit to the borrower, while EPI is a fixed amount of repayments consisting of principal and interest components paid by the borrower towards loan repayment.
RBI specifies that fees collected by regulated entities for third-party services, such as legal and insurance charges, must be included in the APR and disclosed separately in the KFS. Borrowers should receive receipts promptly.
Validity Period and Disclosure: The KFS shall have a validity period during which the borrower can agree to the terms of the loan.
The KFS also includes a computation sheet of APR and the amortization schedule of the loan over the loan tenor.
Charges and Exemptions: Charges recovered from borrowers by regulated entities shall form part of the APR and shall be disclosed separately.
However, credit card receivables are exempted from these provisions.
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