MUMBAI: Borrowers availing home, auto and personal loans can now be assured of a fair deal with the Reserve Bank of India (RBI) making it compulsory for banks to set out every possible cost in respect of the loan in a fact sheet at the processing stage. Banks will also have to publish the 'annual percentage rate' representing the total cost of credit to an individual borrower. Besides, they will have to display on their website the interest rate range for various contracted loans for the past quarter for different categories of advances.
The fact sheet drafted by the central bank requires lenders to spell out the interest rate, the spread above the benchmark rate, date of reset of floating rates, mode of communication of interest rate changes, all fees payable, refundable fees, charges for conversion from floating to fixed rate loan and penalty for delayed payments.
The significance of this fact sheet is that it will make it possible for borrowers to compare loans from two lenders. Also, by making the charges a part of the contract, the central bank has reduced leeway for lenders to vary pre-payment charges subsequently.
Today, an objective comparison is difficult because terms differ vastly. For instance, some of the personal loans have deleterious charges for pre-payment in the first year. Asking banks to disclose an annual percentage rate representing the total cost of credit ensures that customers are not taken in by deceptively low rates with a step-up structure. At the same time, it does not take away the ability of banks to innovate in product design.
The new norms on transparency follow the central bank's revised guidelines for calculating the benchmark base rate to ensure that changes in interest rates are passed on to all borrowers fairly. The new norms are based on recommendations by a working group on cost of the pricing of credit. The committee - which had submitted its report a few months ago - had said that despite efforts via policy to usher in transparency and fairness to the credit-pricing framework, there have been certain concerns from the customer service perspective. These mainly relate to the downward stickiness of the interest rates, discriminatory treatment of old borrowers vis-a-vis new borrowers, and arbitrary changes in spreads.
One of the major recommendations by the committee was that the Indian Banks' Association should develop a new benchmark for floating interest rate products, namely, the Indian Banks' Base Rate, or IBBR. It had also proposed a penalty for banks that refuse or delay transfer of loan for refinance. RBI is yet to take a stand on these two recommendations.
Disclose more information on lending rates, RBI tells banks
The Reserve Bank of India (RBI) on Thursday asked banks to disclose more information on lending rates and fees on their websites, “for promoting transparency in the operations of the banks.”
These guidelines will come into effect from April 1, 2015.
“Banks should display on their website the interest rate range of contracted loans for the past quarter for different categories of advances granted to individual borrowers along with mean interest rates for such loans,” the RBIstated in a notification to all banks.
The central bank said that this would enhance “further transparency in pricing of credit.”
Banks were also asked to disclose the total fees and charges applicable on various types of loans to individual borrower at the time of processing of loan as well as displayed on the website of banks “for transparency and comparability and to facilitate informed decision making by customers.”
The Reserve Bank further stipulated banks to publish Annual Percentage Rate (APR) or similar other arrangement of representing the total cost of credit on a loan to an individual borrower on their websites.
RBI working on comprehensive consumer protection norms for NBFC sector
The Reserve Bank of India is working on comprehensive consumer protection norms for the non-banking finance sector, its Executive Director NS Vishwanathan, has said.
The central bank will also soon align the private placement norms specified for NBFCs with that of the stipulations in the new company law enacted in 2013, Vishwanathan said at an Assocham organised national summit on 'NBFCs--way forward' in the capital on Friday.
Under the new company law, private placement cannot be undertaken with more than 200 persons in a financial year.
However, as per the RBI specified norms, private placement by NBFCs cannot exceed 49 persons in a year.
Vishwanathan also urged the NBFCs to ponder as to whether there should be an ombudsman for the sector on the lines of the one for the banking sector.
This senior RBI official urged NBFCs to take the aspect of "consumer protection' more seriously
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