RBI mandates lenders to provide Key Facts Statement (KFS) to borrowers

In a statement on Monday, the RBI said it has been decided to harmonise the instructions on KFS for loans and advances. “This is being done to enhance transparency and reduce information asymmetry on financial products being offered by different regulated entities, thereby empowering borrowers to make an informed financial decision,” the RBI said.

Key facts statement (KFS) is a statement of key facts of a loan agreement in the simple and easier-to-understand language provided to the borrower in a standardised format. The document provided by lenders to the borrower carries all details of a loan agreement, including the all-in-cost of the loan, the rate of interest, and the annual percentage rate (APR) that includes all other charges associated with the credit facility. Charges recovered from the borrowers by the REs on behalf of third-party service providers on an actual basis, such as insurance charges, legal charges, etc. shall also form part of the APR and shall be disclosed separately. In all cases wherever the RE is involved in recovering such charges, the receipts and related documents shall be provided to the borrower for each payment, within a reasonable time. The KFS will help borrowers compare loan details such as charges and interest rates from all lenders and select the best offer.

Currently, KFS is specifically mandated concerning loans by scheduled commercial banks to individual borrowers; digital lending by REs; and microfinance loans. Now, it has been decided to mandate all REs to provide the ‘Key Fact Statement’ (KFS) to the borrowers for all retail and MSME loans. Providing critical information about the terms of the loan agreement, including all-inclusive interest cost, shall greatly benefit the borrowers in making an informed decision.

“REs shall provide a KFS to all prospective borrowers to help them take an informed view before executing the loan contract, as per the standardised format. The KFS shall be written in a language understood by such borrowers. Contents of KFS shall be explained to the borrower and an acknowledgment shall be obtained that he/she has understood the same”, said RBI.

A unique proposal number shall be provided to the borrower and shall have a validity period of at least three working days’ time for loans having a tenor of seven days or more, and a validity period of one working day for loans having a tenor of less than seven days, to agree to the terms of the loan, the circular said.

Any fees, charges, etc. which are not mentioned in the KFS, cannot be charged by the REs to the borrower at any stage during the term of the loan, without explicit consent of the borrower. However, Credit card receivables are exempted from the provisions contained under the circular.

The KFS shall also be included as a summary box to be exhibited as part of the loan agreement.

Applicability and Commencement

“REs are required to put in place the necessary systems and processes to implement the above guidelines at the earliest. In any case, all new retail and MSME term loans sanctioned on or after October 1, 2024, including fresh loans to existing customers, shall comply with the above guidelines in letter and spirit without any exception. During the interregnum, the relevant provisions on ‘KFS/Factsheet’ under the extant guidelines shall continue to remain applicable, including the ‘Guidelines on Digital Lending’, the Master Direction on ‘Regulatory Framework for Microfinance Loans’, and the circular on ‘Display of Information by Banks’” said RBI.