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Clarity in loan interest and costs demanded by RBI

In its recent notification, RBI has advised banks to be more transparent in dealing with their customers, more particularly with respect to the loans and credits that they offer.

Accordingly, banks would have to now
a) display on their website, the interest and other cost details pertaining to various loans offered by them; and
b) provide a one-page 'key fact statement' to all the borrowers.

The details of the notification, which would be effective from April 1, 2015, are discussed below.

Key Fact Statement
This is a one-page statement that must be provided to all the borrowers during loan processing and also when any terms or conditions undergo a change. It must also form part of the loan / credit agreement.

As per the format prescribed, it should primarily provide the following information:
1.   Amount of the Loan
2.   Tenure of the Loan
3.   Whether the interest type is Fixed or Floating
4.   Applicable rate of interest
      - Base rate % + Margin % (for Floating Rate Loans)
      - Rate % (for Fixed Rate Loans)
5.   Date when the interest rate would be reset
6.   Mode as to how the change in interest rates would be communicated
7.   Break-up of all types of fees, costs and charges payable
      - At the time of loan application
      - During the tenure of the loan
      - At the time of foreclosure
      - Refundable charges if the loan is not sanctioned or disbursed
      - Charges for switching from fixed rate to floating rate and vice versa
      - Delayed payment charges
8.   Equated Monthly Installment (EMI) payable
9.   Details of the security / collateral taken against the loan
10. Date on which the annual statement of the balance loan outstanding will be issued

More importantly, no fine prints are allowed here. RBI even prescribes the "minimum" font size of Arial-12 for this key fact sheet.

Website Display
Banks have to display the following details on their website, pertaining to different categories of loans granted to the individual borrowers.
- Range of interest rates, as also the mean rate, for the loans offered during the previous quarter
- Annual Percentage Rate (APR) or any other parameter that represents the total cost of the particular loan
- All other applicable fees and charges

This information would enable the borrowers to compare costs across different products and lenders, thereby helping them in making an informed choice. 

This is one more of the many steps taken by RBI Governor Dr. Raghuram Rajan to make banking a truly trustworthy and customer-friendly experience. We must all applaud him for the same.

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