The Reserve Bank of India has introduced some changes that will be implemented from October 1st. There will be changes in rules in banks and non-banking financial companies (NBFC) from October 1st on retail and MSME loans.
Read the article to learn all about the new guidelines for MSME loans by the RBI and their possible impact.
Overview
The table below summarises some key details about the latest RBI circular on MSME that one should know.
| Changes concerning | MSME loans |
|---|
| Proposed by | Reserve Bank of India |
| Effective from | October 1st |
| Key document | Key Fact Statement, mandatory for all loan-related activities |
| Objective of the changes | To make the existing system more transparent and ensure fair lending practices |
| Official document | RBI guidelines on MSME loans PDF |
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Latest RBI Circular On MSME
From October on, the borrowers will have to share all information (KFS) about the MSME loan agreement, including interest and other costs. It has been made mandatory to provide all the information regarding loan agreements given by commercial banks to individual borrowers.
It should also provide details for grievances and the likelihood of the loan being sold to others.
The RBI stated that it has been decided to harmonise the instructions on the Key Fact Statement (KFS) for loans. It is a standardised document that comprises all essential terms and conditions of a loan, like the amount of the loan, rate of interest, repayment schedule, etc. KFS is available on any bank’s website or can be requested through email.
KFS serves as a boon as it simplifies every complex bit of information into easy words and guidelines that lenders and borrowers can follow and operate within the boundaries of the law.
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The Need For Changes
This is to increase transparency between all financial institutions coming under the purview of the RBI so that they can provide complete information about the loans to the customers. The borrowers will be able to make financial decisions thoughtfully.
This will be made applicable in the cases of retail and MSME business loans given. The KFS document has all the information about the main facts of the loan agreement. It is written in such a way that the common man can easily understand the language.
This will make all the information clear to the loan takers and eliminate any confusion. The central bank has said that financial institutions will take the necessary measures to implement the guidelines as soon as possible.
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Objectives Of Guidelines On MSME Loans
The RBI guidelines on MSME loans pdf will be for all loans passed on or after October 1, 2024. This includes new loans given to existing customers as well.
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Purview: The RBI said that all amounts, like the insurance and legal fees collected from institutions, are under the purview of the central bank.
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RBI guidelines for MSME takeover charges: It is on an actual basis, on behalf of third-party service providers, that will also be a part of the annual percentage rate (APR). “Charges recovered from borrowers by the regulated entities on behalf of third-party service providers on an actual basis, such as insurance and legal charges, shall also form part of the APR and shall be disclosed separately,” the RBI said.
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APR: APR helps borrowers compare the all-in cost of a loan from various lenders, making it easier for them to make a decision.
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Transparency: All charges should be disclosed separately to customers. Whenever the retained earnings are involved in the recovery of such charges, receipts and related documents must be provided to the borrowers. It must be provided to the borrowers for each payment within a reasonable time.
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All charges to be mentioned: Further, any charges that are not mentioned in the KFS cannot be charged at any stage during the tenure of the loan without the consent of the borrowers. However, in the case of credit cards, the provisions regarding the amount received have been exempted.
This ensures that the customers know exactly what they are getting while applying for a loan, helping them make smart choices and making it fairer for them to make decisions regarding loan taking.
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Applied To: This will be applied to all types of loans for individuals and small businesses, no matter which bank they are dealing with.
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Conclusion
The RBI has been trying to increase transparency on loans for borrowers since 2015. These new guidelines will make it easier for borrowers and digital lenders as well.
The new RBI guidelines coming into effect from October 1st aim to make the loan process more transparent for borrowers, including RBI guidelines for MSME takeover charges. By mandating the provision of a Key Fact Statement containing all key details of interest rates, fees, charges, etc, upfront, borrowers will be able to make more informed decisions.
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