Why is the Reserve Bank of India (RBI) asking banks/NBFCs to disclose loan fees upfront?

It is to significantly improve transparency in securing loans in the country that the Reserve Bank of India has recently asked banks/NBFCs to reveal complete information about the loan fees. Typically, by providing loan borrowers with a document called ‘Key Facts Statement’.

As per the RBI, it should include all data on loan fees along with the annual cost of credit starting from October 1st, 2024. This move is being made by the Central Bank to help borrowers make the right decision while securing any loan.

Please continue to read this ‘Loan Bazaar’ article to understand more key details about the RBI’s decision to make banks/NBFCs divulge complete information on loan fees.

What is the Key Facts Statements dossier?
The ‘Key Facts Statement’ is a document that according to the RBI must include the complete details of the loan fees. The main objective behind creating such a casebook is that the RBI wants to help borrowers make the right choice while securing a loan.

Besides, the RBI also wants the ‘Key Facts Statement’ documentation to include other important details. These include a policy on recovery agents, the chances of a loan being sold to others, and contact details for filing a complaint.

Also, this new rule is set to apply to all types of loans for individuals as well as small businesses. The bank or lender they are dealing with does not make an iota of difference.

Why has the RBI suddenly decided to make loan fees compulsory for banks/NBFCs?
According to Mr. Shrish Garg, leading corporate DSA CEO Loan Bazaar, the motivation behind RBI imposing banks/NBFCs to disclose the complete loan fee information was to help the borrowers understand everything about the loan payment process.

He further adds that the Central Bank intends to make securing a loan more fair to the borrower. Also, you need to understand that the idea behind such a decision taken by RBI is to give borrowers the power to make the ‘Smart Choice’.

Finally, according to Mr. Garg as the general election is fast approaching in the country, the focus of the finance ministry in terms of monetary policies is to maintain an environment of financial inclusion and transparency. To ensure that the mood in the country for the government during this critical period is vibrating with positivity.

What is the new information section/field included in the ‘Key Facts Statement’ documentation?
‘Annual Percentage Rate’ or APR is the new field that is being introduced in the Key Facts Statement. This term essentially is the annual cost of credit to the borrower. In it, interest rates and other charges are included.

Besides, charges acquired from borrowers by organizations that are regulated on behalf of third-party service providers on an actual basis like insurance and legal fees, will also be an integral part of APR.

How does the inclusion of APR in the Key Facts Statement document help borrowers and aggregators?
Typically, the presence of APR in the Key Facts Statement will significantly benefit both the borrowers and the aggregators, by providing them with the opportunity to compare the ‘All-In cost’ of a loan presented by various lenders.

Thereby enabling the borrower and aggregator to choose the right loan to buy and sell respectively.

The RBI has since 2015 attempted to bring in transparency with regards to loan fee procedures. However, it is now in 2024 that the Central Bank has finally found the perfect time to make the process of loan fees completely transparent.