The Reserve Bank of India has set the rules of Key Facts Statement (KFS) for loans and advances. This comes two months after the RBI announced the decision to mandate all regulated entities to provide the KFS to borrowers for all retail and MSME loans.
In an official notification on Monday (April 25), RBI said all regulated entities will be bound by terms of the loan indicated in the Key Facts Statement if the borrower agrees to them.
The Key Facts Statement (KFS) will contain all key information regarding a loan agreement, including all-in-cost of the loan, in simple and easy to understand format.
“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 standardised format,” RBI said.
The KFS will also include a computation sheet of annual percentage rate (APR), and the amortisation schedule of the loan over the loan tenor. Further, the APR will include all charges which are levied by the regulated lender.
The rules for KFS will not apply for credit cards.
KFS Implementation Date
The RBI has directed banks and other regulated entities to issue Key Facts Statement to retail borrowers and small businessmen from October 1, 2024.
“REs shall 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,” RBI said.
From now till October 1, RBI said that “the relevant provisions on ‘KFS/Factsheet’ under the extant guidelines shall continue to remain applicable”
Also Read: What RBI said in February
KFS Format
RBI said that REs shall provide a KFS to all prospective borrowers to help them take an informed view before executing the loan contract, as per a standardised format (check here)
The KFS should be written in a language understood by borrowers. “Contents of KFS shall be explained to the borrower and an acknowledgement shall be obtained that he/she has understood the same,” RBI said.
KFS Validity
The central bank said that the KFS will be provided with a unique proposal number. It will have a validity period of at least three working days for loans having tenor of seven days or more, and a validity period of one working day for loans having tenor of less than seven days.
During the validity period, borrowers can either agree or disagree to the proposal. “The RE shall be bound by the terms of the loan indicated in the KFS, if agreed to by the borrower during the validity period,” RBI said.
Also Read: What is Bank of Baroda ‘BoB World App Scam’ and why is it in the news?
Benefit of Key Facts Statement
The KFS will help borrowers in making informed decisions before taking a loan. Currently, banks have different hidden charges which borrowers get to know only after taking a loan. With the help of KFS, borrowers my be able to compare different loan offers and make the best decision.
In a Thread on X, Sachin Bansal, CEO of Navi explains, “Consumers are typically unaware of all the fees and charges associated with loans they take, most of which are hidden or not called out upfront. This includes Processing fees. Over time, consumers have been unhappy about the processing fees charged by lending companies, but these fees exist for several reasons. One of them is that they help lenders make money and cover the costs of processing loans.”
According to Bansal, lenders usually charge processing fees between 0.5% to 2.5% of the loan amount, and in some cases even more. “This is because there is no upper limit on processing fees a lender can charge, and it depends on factors like loan type, amount, and the borrower’s creditworthiness.”
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