Regulatory updates

During an onsite inspection of Regulated Entities⁸ Regulated entities include the following:
• All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks) excluding Payments Banks
• All Primary (Urban) Co-operative Banks/ State Co-operative Banks/ District Central Co-operative Banks
• All Non-Banking Financial Companies (including Microfinance Institutions and Housing Finance Companies) (REs) for the period ended 31 March 2023, RBI came across cases of unfair lending practices. The key observations are listed below:

• Point of charging interest – REs were charging interest from the date of sanction of loan or date of execution of loan agreement instead from the date of actual disbursement of the funds to the customer. Further, in other cases, interest was charged from the date of the cheque whereas the cheque was handed over to the customer at a later date.
• Duration of interest charged – Customers were charged interest for the entire month, in cases where disbursal or repayment of loans took place during the course of the month.
• Advance instalments – In some cases it was noted that one or more instalments were collected in advance but interest was charged on full loan amount.

In this regard, on 29 April 2024, RBI issued a directive that required all REs to review and make the required changes to their internal systems and practices around loan disbursal, application of interest and other charges in order to have fair and transparent dealings with customers.

To access the text of the directive issued, please click here

A key fact statement is a document given by the lender to the borrower, providing details of a loan agreement including rate of interest and Annual Percentage Rate (APR). It enables borrowers to compare loan details offered from all lenders and finalise the best offer.

Currently, the requirement to provide a KFS and disclose APR is covered under various extant guidelines⁹ Paragraph 2 of Circular on ‘Display of information by banks’ dated 22 January 2015; paragraph 6 of Master Direction on ‘Regulatory Framework for Microfinance Loans’ dated 14 March 2022; and paragraph 5 of ‘Guidelines on Digital Lending’ dated 2 September 2022. , however, there is no consistency in the format of a KFS or reporting requirements.

In order to reduce information asymmetry on financial products being offered by different REs and enhance transparency, on 15 April 2024, RBI issued a notification, providing harmonized instructions pertaining to the issuance of KFS for all retail and MSME term loans extended by all REs:

• All prospective borrowers should be provided a KFS in the standard format provided in Annexure A of the notification. The KFS should be explained to the borrower and an acknowledgement should be obtained that he/she has understood the same.
• The KFS should be valid¹⁰ Validity period refers to the period available to the borrower, after being provided the KFS by the RE, to agree to the terms of the loan. for at least three working days for loans having tenor of seven days or more and one working day for loans having tenor of less than seven days¹¹ In view of the stipulation relating to the validity period of the KFS, the provision at paragraph 8 of the ‘Guidelines on Digital Lending’ relating to mandatory minimum number of days for post-sanction cooling-off period, shall stand partially modified as under:
  “A borrower shall be given an explicit option to exit digital loan by paying the principal and the proportionate APR without any penalty during this period. The cooling off period shall be determined by the Board of the RE, subject to the period so determined not being less than one day. For borrowers continuing with the loan even after look-up period, pre-payment shall continue to be allowed as per extant RBI guidelines.” .
• The RE would be bound by the terms of the loan indicated in the KFS, if agreed to by the borrower during the validity period.
• The KFS should include a computation sheet of Annual Percentage Rate (APR) and amortization schedule of the loan over the loan tenor¹² Illustrative examples of calculation of APR and disclosure of repayment schedule for a hypothetical loan are given in Annex B and C of the notification respectively. .
• Any fees, charges, etc. which are not mentioned in the KFS, cannot be charged by the REs to the borrower at any stage during the term of the loan, without explicit consent of the borrower.
• Charges that are recovered from the borrowers by the REs on behalf of third-party service providers on actual basis, such as insurance charges, legal charges etc., should also form part of the APR and be disclosed separately.

It is to be noted that credit card receivables are exempted from the provisions contained under this notification.

Applicability and commencement: REs should put in place the necessary systems and processes to implement the above guidelines at the earliest. In any case, all new retail and MSME term loans sanctioned on or after 1 October 2024, including fresh loans to existing customers, should comply with the above guidelines in letter and spirit without any exception. During the interregnum, the relevant provisions on ‘KFS/Factsheet’⁹ under the extant guidelines shall continue to remain applicable,

To access the text of the directive issued, please click here