**Executive Summary**
This document is a response from the Minister of State for Finance to questions raised in the Lok Sabha concerning personal loans. It addresses concerns about amortization practices, RBI directives, and transparency. A key action item is the provision of a Key Facts Statement (KFS) for new retail and MSME term loans sanctioned on or after 1.10.2024, as per RBI notification.
**Key Points / Main Content**
* **Regulatory Framework:**
* Credit-related matters of Regulated Entities (REs), including interest rates, are largely deregulated, governed by Board-approved loan policies within regulatory and statutory requirements.
* RBI issues guidelines to ensure fair, transparent, and equitable interest rate practices.
* **Interest Calculation:**
* Interest rates must be charged on monthly rests, calculated on the outstanding principal balance.
* Commercial banks in India typically use standard amortization methodology for personal loans, computing interest on the outstanding amount each day.
* **Repayment Flexibility:**
* Excess payments are adjusted towards the principal, reducing the outstanding amount and interest.
* The 'amortized' nature of repayment allows borrowers to customize repayment plans.
* **Transparency and Disclosure:**
* Lenders must properly assess credit applications and provide a copy of the loan agreement and enclosures to borrowers.
* Regulated Entities (REs) are required to provide a Key Facts Statement (KFS) for new retail and MSME term loans sanctioned on or after 1.10.2024.
* The KFS contains details like the APR computation sheet and loan amortization schedule.
* The KFS must be in a language understood by the borrower and explained, with acknowledgement of understanding required.
* **Fair Practices Code (NBFCs):**
* RBI regulations on interest rates for NBFCs prioritize fairness and transparency.
* The regulatory approach emphasizes the responsibility of lending institution boards in ensuring transparency.
**Impact Analysis**
**Borrowers**
* **Impact:** Increased transparency in loan terms and interest calculations. Ability to customize repayment plans.
* **Action Required:** Review the Key Facts Statement (KFS) for all new retail and MSME term loans sanctioned on or after 1.10.2024, understand its contents, and acknowledge understanding.
**Regulated Entities (REs) / Lenders**
* **Impact:** Must adhere to RBI guidelines for fair interest rate practices and transparency. Obligation to provide Key Facts Statement (KFS).
* **Action Required:** Provide Key Facts Statement (KFS) as per RBI notification for new retail and MSME term loans sanctioned on or after 1.10.2024. Ensure KFS is in a language understood by the borrower, explain its contents, and obtain acknowledgement of understanding.
**Reserve Bank of India (RBI)**
* **Impact:** Responsible for issuing and updating guidelines to ensure fair and transparent lending practices.
* **Action Required:** Continue to monitor and enforce compliance with existing guidelines and the new KFS requirement.
Key Entities Referenced
Reserve Bank of India (RBI): The central bank of India, responsible for issuing guidelines and directives to ensure fair and transparent lending practices, including interest rate calculations and disclosures.
Fair Practices Code: Code issued by the RBI for lenders, ensuring credit application assessment and disclosure of loan agreement details to borrowers.
Key Facts Statement (KFS): A notification by the RBI, requiring Regulated Entities to provide a statement including the Annual Percentage Rate (APR) and amortisation schedule for new retail and MSME term loans.
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF FINANCIAL SERVICES
LOK SABHA
UNSTARRED QUESTION NO. † 26
ANSWERED ON MONDAY, DECEMBER 1, 2025/ AGRAHAYANA 10, 1947 (SAKA)
Personal Loans
†26. SHRI SANATAN PANDEY:
Will the Minister of FINANCE be pleased to state:
(a) whether the Government considers advance- loaded amortization of personal loans as
structurally unfair to financially responsible borrowers, if so, the details thereof;
(b) whether the Reserve Bank of India has issued any directives to address ethical and
economic concerns related to such practices, if so, the details thereof;
(c) whether the Government is considering to review current loan amortization structures to
ensure transparency, equitable and proportionate to the actual loan term, if so, the
details thereof;
(d) the steps being taken to ensure that borrowers are adequately informed in simple
language about the financial implications of loan structures;
(e) whether the Government proposes to introduce regulations to standardize interest
calculations based on outstanding principal rather than predetermined schedules; and
(f) if so, the details thereof?
ANSWER
THE MINISTER OF STATE FOR FINANCE
(SHRI PANKAJ CHAUDHARY)
(a) to (f): Credit related matters of regulated entities (REs), including the manner of charging
interest, are largely deregulated and the same are governed by the Board approved loan
policies of the lenders framed under the ambit of relevant regulatory and statutory
requirements and terms and conditions of the loan agreement between the borrower and
the REs. Further, Reserve Bank of India (RBI) has issued several guidelines from time to
time in order to ensure that the process of fixing and charging of interest rates to the
borrowers is fair, transparent, and equitable for both parties. RBI guidelines also mandate
that the interest rate must be charged on monthly rests, implying that interest needs to be
calculated every month on the outstanding principal balance (including any accrued but
unpaid interest).
Commercial banks in India usually follow the standard amortization methodology for
repayment of personal loans. In the said methodology, interest is computed and charged
only on the outstanding amount of each day. Any excess amount paid by the borrower over
and above the scheduled EMI, is adjusted towards the principal, resulting in reduction inoutstanding amount, entailing lower interest outgo. The ‘amortized’ nature of repayment of
personal loans provides flexibility and ensures that borrowers can customize the repayment
plan as per their financial strength and repaying capacity.
Further, the Fair Practices Code for lenders, issued by RBI, lenders should ensure that there
is proper assessment of credit application and they should furnish a copy of the loan
agreement along with a copy of all enclosures quoted in the loan agreement to all the
borrowers. Also, as per the notification by the RBI, Regulated Entities need to provide a Key
Facts Statement (KFS) (applicable to all new retail and MSME term loans sanctioned on or
after 1.10.2024) containing key facts like computation sheet of annual percentage rate
(APR), amortisation schedule of the loan over the loan tenor etc. to all prospective
borrowers. The KFS enhances transparency and reduce information asymmetry on financial
products being offered by different REs, thereby empowering borrowers for making an
informed financial decision. The KFS is to be written in a language understood by such
borrowers and its contents are to be explained to the borrower and an acknowledgement is
to be obtained that he/she has understood the same.
As per RBI’s conduct of business regulations/ fair practices code for NBFCs, the regulations
on interest rates on advances are based on the principles of fairness and transparency so
that an informed decision could be taken by the borrowers before entering into any
relationship with NBFCs. The regulatory approach in this regard has evolved towards
making the Boards of the respective lending institutions more responsible and ensuring
greater transparency for the borrowers.
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