In a move aimed at enhancing transparency and empowering borrowers, the Reserve Bank of India (RBI) has issued a directive requiring lenders to furnish ‘Key Fact Statements’ (KFS) to all borrowers of new retail and MSME term loans sanctioned on or after October 1, 2024. This mandate extends to fresh loans granted to existing customers as well.
The KFS, designed to present vital loan agreement details in a clear and understandable format, will be a crucial component of loan documentation. It includes comprehensive information such as the all-in cost of the loan, aiding borrowers in making informed decisions before signing the loan contract. Notably, this initiative excludes credit card receivables from its provisions.
Addressed to regulated entities including all commercial banks, co-operative banks, and non-banking financial companies (including housing finance companies), the RBI’s circular emphasizes the importance of providing KFS to prospective borrowers. The statement will be presented as a summary box within the loan agreement, using language familiar to the borrowers. It is mandated that the contents of the KFS must be explained to the borrower, who is then required to acknowledge understanding of the same.
Validity periods for the KFS have been specified by the RBI. For loans with a tenor of seven days or more, the KFS must have a validity period of at least three working days. For loans with a tenor of less than seven days, the validity period is set at one working day. During this period, borrowers are expected to review the terms and conditions outlined in the KFS and provide their agreement. Once agreed upon during the validity period, the borrower will be bound by the terms indicated in the KFS.
The KFS will also include a computation sheet detailing the annual percentage rate (APR) and the amortisation schedule of the loan over its tenor. This APR calculation will encompass all charges imposed by the lending institution. Furthermore, charges recovered from borrowers on behalf of third-party service providers, such as insurance and legal charges, will be part of the APR and must be disclosed separately in the KFS.
Importantly, any fee or charge not explicitly mentioned in the KFS cannot be levied by the lending institution during the loan term without the explicit consent of the borrower. To ensure transparency, the RBI has instructed lending institutions to provide borrowers with receipts and related documents for all such charges recovered within a reasonable timeframe.
The RBI has directed lending institutions to swiftly implement the necessary systems and processes to comply with the KFS guidelines for all retail and MSME term loan products. This measure is poised to empower borrowers with essential information and foster greater transparency in the lending landscape, aligning with the RBI’s ongoing efforts to promote responsible lending practices.
