RBI Flags Issue Of High Rates On Small Loans, Says Hidden Charges Must Be Revealed In KFS

RBI has said that the regulatory freedom enjoyed by regulated entities in respect of interest rates and charges should be used judiciously to ensure fair and transparent pricing of products and services and the same should be communicated properly in the key fact statement to allow borrowers to make informed decision on loans
Interest Rates, 
Small Loans, 
Reserve Bank Of India
Loans, Interest Rates, KFS, Small Loans, Reserve Bank Of India

Reserve Bank of India (RBI) Governor Shaktikanta Das on June 7, 2024 raised concern over the high rate of interest on small-value loans, at the conclusion of the three-day monetary policy committee (MPC) meeting.

He said that some companies continue to impose fees that are not disclosed in the key fact statements (KFS) of the loan. As such, there is a need for engagement with sectoral players with a focus on addressing these issues to ensure transparency and fairness in lending practices.

“Customer protection remains on top of the Reserve Bank’s priorities,” Das said.

Though the guidelines on KFS are followed, Das said that a few regulated entities still charge fees, etc. that are not specified or disclosed in KFS.

Says Sameer Singh Jaini, founder and CEO, The Digital Fifth: “RBI had issued a key notification on April 15, 2024 on KFS for loans and advances, which needs to be implemented by October 1, 2024. This notification has been made to ensure that the customers know upfront the overall rate of interest (annual percentage rate or APR), which includes all the charges as well as interest charged to the customer.”

Jaini adds: “We have seen that APR for short term loans (less than six months) offered by some lenders is extremely high (often more than 50 per cent) as they tend to charge flat rate (say 2.5 per cent) as well as processing fees of 2 per cent (or more). In addition, there are charges made related to penalty, documentation etc., which are not included in KFS. Many gullible customers are unable to understand these charges and end up defaulting due to excessive rates.”

What Is KFS?

KFS contains key information regarding a loan agreement, including an all-in cost of the loan, in a simple and easy-to-understand manner.

Earlier in April 2024, RBI had asked lenders to provide a KFS to borrowers of all new retail and micro and small and medium enterprise (MSME) term loans sanctioned on or after October 1, 2024, including fresh loans to existing customers.

The RBI said in a circular that it has made it mandatory for all regulated entities to provide a KFS to all prospective borrowers. KFS aims to enable borrowers to make an informed choice before executing the loan contract. The circular was addressed to regulated entities, including all commercial banks, co-operative banks, and non-banking financial companies (NBFCs), including housing finance companies (HFCs).

High Interest Rates On Small-Value Loans

Das said that some microfinance institutions and NBFCs charge a high rate of interest on small-value loans.

He said the MPC has reinstated that the regulatory freedom enjoyed by the regulated entities in respect of interest rates and charges should be used judiciously to ensure fair and transparent pricing of products and services.

“The RBI continues its constructive engagements with such financial entities to safeguard the interest of customers and ensure overall financial stability,” Das said.

He further said the interest rates charged by lenders are de-regulated under the Fair Practices Code. “This is not a system-wide problem, but there are some outliers with whom we are engaging regularly to understand what is the basis of charging such a high-interest rate,” Das said in his media briefing.

He further said that there are some hidden charges, which must be revealed as mandated by the KFS. “The key fact statement must detail annualised rate of interest, including a breakdown of processing fees and other charges,” Das added.

"RBI is pushing the ecosystem to align with the fair practices and ensure that the APR is not exorbitant and no customer is charged beyond what is given in KFS without explicit consent," Jaini says.

Adhil Shetty, CEO of Bankbazaar.com said that the borrowers may face continued high interest rates on loans. The MPC today maintained the status quo by keeping the interest rates unchanged at 6.5 per cent.

“Since the repo rate directly influences lending rates, an unchanged rate means existing loans remain benchmarked to an elevated repo rate at 6.50 with the possibility of new loans being offered with lower spreads than older loans,” Shetty said.

Related Stories

No stories found.
Outlook Business & Money