What Do RBI Rules on Personal Loans Say?

Factors Lenders Keep in Mind Before Landing

Creditworthiness and Loan Approval Process

The regulations established by the Reserve Bank of India (RBI) are primarily focused on a borrower's creditworthiness being assessed based on their credit scores to determine loan approvals, the amount of loan disbursed, and the applicable rate of interest.

In particular, risk assessment has improved, with the regulatory framework allowing financial institutions to assign higher weight to risk borrowers on underpinned assumptions of increased credit risks.

In addition to credit scores, another aspect of the regulations is that lenders are required to submit borrower profile data to credit bureaus more frequently, with the cycles shortened to 15 days.

This provides banks and other financial institutions with the opportunity to make timely updates to ensure that the credit profile related to the financial behavior of the borrower is completely accurate and to address unethical practices that include "evergreening" loans.

Loan Recovery Process and Borrower Rights

FAQs

What is the Key Facts Statement (KFS)?

A KFS is a document that lenders are required to give, which summarizes the details of the loan, such as interest rates, fees, penalties and repayment schedules to keep borrowers on track.

How does RBI ensure borrowers are informed about loan rejections?

Lenders must inform the borrower of the reason for the denial (for loans under ₹2 lakhs), if the loan terms are changed, or that they will issue a notice for cancelling the loan or for early repayment.

How is a borrower’s credit-worthiness valued under RBI rules?

Credit-worthiness is mainly evaluated on the basis of credit score, which will influence the loan approval process, loan amount and applicable interest rates. Additional risk is assessed for high-risk borrowers.

Why do lenders send data more frequently to credit bureaus?

Data reporting cycles are now down to 15 days to allow for a more accurate timing of the update of borrower data, prevent potential abusive/ unethical practices such as "evergreening", and assist lenders with gathering more information when making their lending decision on borrowers.

What are the rules for loan recovery?

Neither the lenders nor a recovery agent is allowed to use harassment, abuse, intimidation, or unethical practices during the recovery of documents. All recovering processes must follow the Fair Practicing Policy, i.e., following a Notice of Default and offering structured repayment.

What options do borrowers have if they have their rights are violated?

Borrowers have the ability to challenge lender actions through the courts if their rights have been violated during the process of recovering reserved documents, abusive/ unethical practices, racial prejudice, or lack of transparency.