Taking out a bank loan can be a stressful experience, especially if one is not aware of the charges that could be levied by the lender over and above the loan interest rate. To be sure, some lenders do share all such charges in a key fact statement (KFS) before the loan agreement is signed, but not all borrowers keep an eye out for it. But its importance is underscored by the fact that the Reserve Bank of India (RBI) last week made it mandatory for all lenders to provide the KFS to all borrowers.
The KFS is a one-page document that contains information such as the rate of interest, loan amount, loan term, processing fees, documentation charges, foreclosure charges and late payment fee, among others. Certain categories of lenders also disclose an all-inclusive annual percentage rate (APR) and recovery and grievance redress mechanism in the KFS.
View Full Image
“Historically, the cost of borrowing has been opaque for many consumers. Interest rates were prominently advertised, but the additional fees that significantly affect the overall cost were often disclosed in a less transparent manner. This practice made it challenging for borrowers, especially those seeking small-ticket or personal loans, to accurately compare loan products and understand the actual cost of borrowing.” says Raj Khosla, founder and managing director of MyMoneyMantra.com.
“The inclusion of all charges in the KFS is a move toward a more consumer-centric lending environment,” he adds.
What will change
Currently, regulated entities giving digital loans and microfinance lenders are mandated to provide a KFS to borrowers. Now, lenders (be it banks or non-banking financial companies) processing physical loan applications will also have to provide one. In the case of scheduled commercial banks, they were mandated to provide it to individual borrowers and not micro, small and medium enterprises (MSMEs ). Now, it is mandatory for both retail and MSME loans.
View Full Image
“While large corporates have an army of finance professionals to pore over the agreements and check all the information, small borrowers and MSMEs would mostly just go by the word of the bank’s sales team or even their chartered accountants. There are lots of sections around fees, charges and penalties which are hidden in the loan agreements. The KFS will give the borrower a summary of all this in a simplified table format,” says Samit Singh, a former banker.
Another important change relates to the APR. Borrowers must understand that there is a difference between annualized interest rate and APR. The latter is supposed to be an all inclusive factor in other loan costs.
Take, for example, a ₹1 lakh loan obtained from a non-banking firm at 18% interest and a tenure of 36 months. The APR in this case would come in at 20.16%, data from MyMoneyMantra shows (see graphic). This is because the lender will be levying a processing fee, insurance charges and other upfront charges, which would be included in the APR.
Banks typically provide the APR in case of credit card loans, and digital lenders provide it for some types of loans. With the recent announcement, the RBI is aiming for a uniform KFS structure across lenders and loan types for more transparency.
Which charges will get included in APR? “The RBI wants the APR to be the effective annualized interest rate. It should be based on an all-inclusive cost and margin including cost of funds, credit cost and operating cost, processing fee, verification charges, and maintenance charges. It will not include contingent charges like penal charges or late payment fees.” says Adhil Shetty, chief executive and co-founder of BankBazaar.
The long list of charges could vary from one lender to another. “Typically, the charges are to do with either payment or non-payment. For example, there may be prepayment or pre-closure charges, which are charges related to payment, and there may be late payment fees, cheque bounce charges or EMI bounce charges, which are related to non-payment. Lastly, there may be fees on account of legal checks, paperwork, and statutory payments such as MOD ,” says Shetty.
A memorandum of deposit, or MOD, is a document prepared in case of home loan.
