A loan sanction letter feels like good news, and many borrowers sign it without reading past the loan amount. But the sanction letter and the papers that come with it fix your rate, your charges and your rights for years. This guide shows what each clause means, what RBI requires lenders to disclose, and the red flags to check before you sign.
What is a sanction letter, and how is it different from the KFS?
You will usually get three documents:
- Sanction letter. The lender's approval, with the loan amount, rate, tenure, fees and conditions you must meet before disbursal.
- Key Facts Statement (KFS). A standard summary of the loan's key terms and all-in cost, in a format set by RBI.
- Loan agreement. The full legal contract. RBI requires the KFS to appear as a summary box in the agreement too.
Read them together. If the numbers in the three do not match, ask the lender to correct it in writing before you sign.
What must the Key Facts Statement show?
RBI's KFS rules apply to all retail and MSME term loans sanctioned on or after 1 October 2024, at banks, NBFCs (non-bank finance companies) and housing finance companies, among others. Credit card dues are excluded. The main rules:
- The KFS must be in a language you understand, explained to you, and you must acknowledge that you have understood it.
- It must carry a unique proposal number and stay valid for at least three working days for loans of seven days or more. You do not have to sign on the spot.
- It must include the APR (annual percentage rate), which is the all-in yearly cost including fees. Charges collected for third parties, such as insurance or legal fees, must form part of the APR and be shown separately.
- It must include the repayment schedule for the whole tenure.
- Fees or charges not mentioned in the KFS cannot be charged during the loan without your explicit consent.
Which clauses should I check in a loan sanction letter?
The KFS format has fixed fields. Here is what to look for in each, and in the sanction letter.
| Clause | What to check |
|---|---|
| Interest rate and type | Fixed, floating or hybrid. A "fixed" rate may be fixed only for a few years. Check what happens after that. |
| Reference benchmark | For floating loans: repo rate, MCLR, T-bill or the lender's own benchmark. Banks link new floating retail loans to an external benchmark such as the repo rate. |
| Spread | The margin added to the benchmark. Benchmark plus spread equals your rate. The spread is what you negotiate. |
| Reset periodicity | How often your rate is revised, in months. |
| Impact of a 25 bps change | The KFS shows how your EMI and number of EMIs change if the benchmark moves by 0.25 percentage points. |
| Fees and charges | Split into amounts payable to the lender and to third parties through the lender, one-time or recurring. Check every line has an amount. |
| APR | Compare APRs, not just headline rates, across offers. |
| Penal charges | The charge for late payment. It must be a charge, not extra interest. |
| Foreclosure charges | The cost of closing early, if any. See the RBI rule below. |
| Switching charges | The fee to move from floating to fixed, or back. |
| Cooling-off or lock-up period | Any period in which you can exit or prepay without a penalty. |
| Recovery agents | The agreement clause on engaging recovery agents, and any agent named. |
| Grievance officer | Phone number and email of the nodal grievance redressal officer. |
| Return of property papers | For secured loans, the timeline and place for returning your original documents after closure. |
Worked example: what the 25 bps line tells you
Say your sanction is ₹50,00,000 for 20 years (240 months) at 8.50%, floating. The EMI, using the standard formula EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), is about ₹43,391. Here P is the loan, r is the monthly rate (8.50 ÷ 12 ÷ 100) and n is the number of months.
If the benchmark rises by 0.25 points, your rate becomes 8.75%:
- If the EMI goes up: the new EMI is about ₹44,186, or ₹795 more a month.
- If the tenure goes up instead: the same ₹43,391 EMI needs about 253 EMIs, the last one smaller, about 13 more than before.
Now a fee check. If the processing fee is 0.50% of the loan, that is ₹25,000. GST at 18% applies to loan processing charges, so you pay ₹29,500. The KFS should show this amount, and it should be included in the APR.
What does RBI say about prepayment and property papers?
- Prepayment and foreclosure. For floating rate loans to individuals for non-business purposes, sanctioned or renewed on or after 1 January 2026, no regulated lender can levy prepayment charges. Fixed rate loans follow the lender's policy, so read this clause closely if your rate is fixed.
- Return of documents. After you repay in full, the lender must return all original property documents and remove charges registered with any registry within 30 days. The sanction letter must state the timeline and place of return. If the lender causes a delay, it must pay you ₹5,000 for each day of delay. If papers are lost or damaged, the lender must help you get certified copies and bear the cost, with an extra 30 days to do so.
- Penal charges. They must be reasonable, disclosed in the agreement and KFS, and no interest can be charged on them.
The KFS, property-document and penal-charge rules were first issued as RBI circulars in 2023 and 2024. RBI has since consolidated many older circulars into new Master Directions for each type of lender (November 2025), so check the latest directions for the current text.
What are the red flags in a sanction letter?
- A floating rate with no benchmark or spread stated, only a final rate.
- Charges written as "as applicable" or "at actuals" with no amount or method.
- Late payment shown as extra interest (for example "2% per month additional interest") instead of a penal charge.
- Insurance, add-ons or third-party fees deducted from the loan but missing from the KFS or the APR.
- A prepayment charge on a floating rate, non-business loan to an individual sanctioned from 1 January 2026.
- Pressure to sign the same day, though the KFS must stay valid for at least three working days.
- Rate, amount or fees that differ between the sanction letter, the KFS and the agreement.
- Conditions you cannot meet, such as documents you do not have, which could block disbursal later.
What should I do before I sign?
- Ask for the KFS with every offer, and compare APRs side by side.
- Note the benchmark, spread and reset period. Ask for a lower spread if another lender offers less.
- Ask whether insurance is compulsory, and whether you can choose your own policy.
- Get any promise made verbally, such as a fee waiver, added in writing.
- Keep signed copies of the sanction letter, KFS and agreement.
Do it in 10 minutes, free
Holding two or more offers? Use the compare offers calculator on LowerMyEMI to put rates, fees and tenure side by side and see the real cost, with Excel or PDF export. Already have a loan? Enter it once and we draft a letter to your own bank and one email per lender asking for a lower rate, for you to send from your own email.