 "MSMEs")
The Reserve Bank of India’s (RBI’s) decision to mandate all regulated entities to provide the key fact statement (KFS) to borrowers for all retail and micro, small and medium enterprise (MSME) loans will enhance transparency and financial literacy.
Bankers also expect that it will prevent potential instances of mis-selling and predatory pricing.
In its statement on Developmental and Regulatory Policies, the RBI highlighted that currently, the KFS is specifically mandated for loans by scheduled commercial banks to individual borrowers, digital lending by regulated entities, and microfinance loans.
Providing critical information about the terms of the loan agreement, including the all-inclusive interest cost, will significantly benefit borrowers in making informed decisions. The RBI issued this statement alongside the Monetary Policy Review on Thursday.
Dinesh Kumar Khara, chairman of State Bank of India (SBI), said that having a KFS for retail and MSME advances will empower customers to make informed decisions.
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Atul Kumar Goel, chairman of the Indian Banks’ Association and managing director (MD) and chief executive officer of Punjab National Bank, seconded the SBI chairman’s view, mentioning that it could help customers understand the total cost of loans and make informed decisions.
This disclosure, already applicable to digital loans and microfinance loans of non-banks, will improve transparency and enable borrowers to make informed decisions when seeking a loan.
The mandate will be particularly relevant for shorter-tenure loans with relatively higher upfront processing fees but competitive interest rates, according to Ajit Velonie, senior director at CRISIL Ratings.
H P Singh, chairman and MD of Satin Creditcare Network, highlighted that this initiative will enable borrowers to be more prudent while taking loans. It will also help lenders perform due diligence on customers more effectively and understand their needs better.
Additionally, this will bolster financial literacy by familiarising borrowers with key loan and financial terms, thereby raising financial awareness and aiding prudent decision-making.
Given that consumer protection is one of the main focuses of the RBI, this step will safeguard the interests of borrowers with clear and comprehensive information. Singh added that it would prevent potential instances of mis-selling, hidden charges, or predatory lending practices.
