In a bid to ensure transparency, the Reserve Bank of India (RBI) has directed banks and non-banking financial companies (NBFCs) to provide individuals and businesses seeking loans key facts statement (KFS) regarding their loan agreements from October 1, 2024.
A directive was issued by the top bank in this regard on Monday (April 15, 2024), the central bank said that retail and micro, small, and medium enterprises (MSMEs) loan agreements will now need a Key Facts Statement (KFS) that will provide comprehensive information on all terms, including interest rates and additional costs. However, credit card receivables are exempted from these rules.
According to the RBI, the decision has been taken to enhance transparency and reduce information asymmetry on financial products being offered by different regulated entities, thereby empowering borrowers to make informed financial decisions. The RBI instructions will be applicable in cases of all retail and MSME term loan products extended by regulated entities (REs).
Under the fresh guidelines, REs have been barred from imposing fees or charges not mentioned in the KFS without explicit consent from the borrower during the loan term. RBI 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.”
Key Facts of a loan agreement between an RE/a group of regulated entities (Res) and a borrower are legally significant and deterministic facts that satisfy the basic information required to assist the borrower in making an informed financial decision. Meanwhile, a Key Facts Statement (KFS) is a statement of key facts of a loan agreement, in simple and easier-to-understand language, provided to the borrower in a standardized format.
As per the RBI circular, the KFS will be written in a language understood by borrowers, and contents of the KFS shall be explained to the borrower and an acknowledgment shall be obtained that he/she has understood the same.
Furthermore, the KFS will be given a unique proposal number and shall have a validity period of at least three working days 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.
In line with this, regulated entities (REs) have been mandated to implement the guidelines without exception for all new retail and MSME term loans sanctioned on or after October 1, 2024.
The regulations will also be applicable to existing customers who are availing of fresh loans. The RBI circular said, “Charges recovered from the borrowers by the REs on behalf of third-party service providers on 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.”
