The Reserve Bank of India (RBI) has issued a significant directive concerning transparency and fairness in loan agreements. Point No. 8 in RBI/2024-25/18 dated April 15, 2024, addresses the requirement for explicit consent regarding additional charges on loans.
According to the directive, any fees, charges, or other financial obligations not explicitly mentioned in the Key Facts Statement (KFS) provided to borrowers cannot be imposed by Regulated Entities (REs) without the explicit consent of the borrower.
By mandating explicit consent for additional charges not outlined in the KFS, the RBI aims to prevent any potential misunderstandings or unfair practices in the lending process.
This KFS aims to facilitate informed decision-making before entering into a loan agreement, following a standardized format. However, the circular exempts credit card receivables from these provisions.
The KFS, to be included as a summary box in the loan agreement, must be written in a language understandable to borrowers. Its contents must be explained to the borrower, who must acknowledge their understanding. The KFS will be assigned a unique proposal number and will be valid for at least three working days for loans with a tenor of seven days or more, and one working day for shorter-term loans, as specified in the circular.
The validity period refers to the time given to the borrower, after receiving the KFS, to agree to the loan terms. By agreeing during this period, borrowers are bound by the terms outlined in the KFS. The KFS will also include an APR computation sheet and the loan’s amortization schedule over its tenor, encompassing all charges levied by the regulated entities.
Furthermore, any charges recovered from borrowers by the regulated entities on behalf of third-party service providers, such as insurance or legal charges, will be part of the APR and must be disclosed separately. The circular mandates that receipts and related documents for such charges be provided to the borrower for each payment within a reasonable timeframe.
Importantly, regulated entities are prohibited from charging any fees or charges not mentioned in the KFS without explicit consent from the borrower during the loan term.
The Reserve Bank has now instructed regulated entities to establish the necessary systems and processes promptly to implement these guidelines concerning KFS for retail and MSME term loan products.
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