How RBI's Key Fact Statement Will Benefit Borrowers

Feb 14, 2024 / Reading Time: Approx. 5 mins

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Regarding additional charges imposed by lending institutions, the Reserve Bank of India has implemented measures to improve transparency and boost financial literacy among retail and micro, small, and medium enterprise (MSME) borrowers. Under the new guidelines, all lenders are required to disclose in the Key Fact Statement (KFS) any charges, like processing fees and documentation charges, that contribute to the loan's cost. This directive, announced by RBI Governor Shaktikanta Das during the recent monetary policy announcement on February 8, aims to equip borrowers with crucial information.

According to the latest RBI notification, all lending entities must furnish the Key Fact Statement (KFS), disclosing all charges, such as processing fees and documentation charges, incorporated into the loan's interest rate. Additionally, the KFS will also encompass vital details, including mechanisms for recovery and grievance redressal, thus ensuring that borrowers possess the necessary information to make well-informed decisions.

This initiative seeks to provide borrowers with insight into the true annual interest rate they are paying on their loans. Importantly, this requirement applies not only to digital lending platforms but also to all banks and Non-banking Finance Companies (NBFCs) offering retail and MSME loans.

By implementing this measure, the RBI aims to enhance customer-centric practices and increase transparency within the lending sector. Furthermore, this move is expected to significantly reduce the possibility of lenders imposing hidden charges on loans, as the disclosed annualised interest rate will include both one-time fees and other charges imposed by banks and NBFCs.

The RBI Governor while introducing the initiative said, "At present, the loans and advances availed by borrowers, apart from including the rate of interest, also include other fees and charges such as processing fees, documentation charges, etc. To enhance transparency in the disclosure of such information, the Reserve Bank of India had mandated certain categories of lenders to provide the borrower with a Key Fact Statement (KFS) containing essential information such as the all-inclusive Annual Percentage Rate (APR) and recovery and grievance redress mechanism."

"The requirement of KFS is now being extended to cover all retail and MSME loans. This measure will lead to enhanced transparency in lending and enable customers to make informed decisions.", he added.

As outlined in the RBI's Statement on Developmental and Regulatory Policies, the Key Fact Statement (KFS) will encompass crucial details concerning the loan agreement. The statement emphasised, "A Key Fact Statement (KFS) containing the key information regarding a loan agreement, including the all-in-cost of the loan, in a simple and easy-to-understand format."

Currently, the KFS is specifically mandated for loans extended by scheduled commercial banks to individual borrowers, digital lending by regulated entities (REs), and microfinance loans.

The Governor, during the Monetary Policy Committee (MPC) outcome announcement, stated, " 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 costs, shall greatly benefit the borrowers in making an informed decision."

Shaktikanta Das highlighted the central bank's recent efforts to enhance transparency and disclosure by REs in loan pricing and other charges imposed on customers. One such measure includes requiring lenders to furnish borrowers with a KFS containing key loan agreement information presented in a straightforward and comprehensible manner.

What Is a Key Fact Statement?

A Key Fact Statement, popularly known as a KFS, is a document furnished by banks and NBFCs to potential borrowers, mentioning all terms and conditions, charges, and the interest rate of a loan. It serves as an easy-to-understand document intended to equip prospective borrowers with essential information for making informed decisions before committing to a loan.

The RBI instructed banks to commence issuing KFS from April 01, 2015, through their circular in January 2015. According to the stipulations of the January 2015 circular, " Banks should furnish a clear, concise, one-page key fact statement/fact sheet, adhering to the prescribed format, to all individual borrowers at each stage of the loan processing, as well as in the event of any alteration in terms and conditions. This information may also be presented as a summary box to be prominently displayed within the credit agreement."

How Will the New Regulations Benefit the Borrowers?

As highlighted by Shaktikanta Das, banks are now obligated to transparently disclose the Annual Percentage Rates (APR) applicable to loans. The new directive mandating Key Fact Statements (KFS) to include all the fees and charges in APR is highly beneficial to borrowers for several reasons:

1. Enhanced Transparency:

By requiring lenders to provide clear and concise information about loan terms, conditions, charges, and interest rates in the KFS, borrowers gain a comprehensive understanding of their financial obligations. This transparency empowers them to make well-informed decisions about borrowing.

2. Prevention of Hidden Charges:

The KFS helps prevent lenders from imposing hidden charges on loans by ensuring that all fees and charges are disclosed upfront. This transparency reduces the risk of borrowers being surprised by unexpected costs later in the loan term.

3. Comparative Analysis:

With standardised information provided in the KFS, borrowers can easily compare loan offers from different lenders. This enables them to choose the option that best suits their financial needs and preferences, fostering a competitive lending market.

4. Improved Financial Literacy:

The KFS serves as an educational tool, promoting financial literacy among borrowers. By presenting complex financial information in a simple and easy-to-understand format, borrowers can develop a better understanding of loan agreements and financial concepts.

5. Empowerment in Decision-making:

With access to comprehensive and transparent information, borrowers are empowered to negotiate better terms with lenders or seek alternative financing options if necessary. This empowerment helps borrowers to assert their financial rights and interests effectively.

To conclude:

The introduction of Key Fact Statements (KFS) by the Reserve Bank of India marks a significant stride towards transparency and consumer protection in the lending landscape. By mandating lenders to provide clear and comprehensive information about loan terms, charges, and interest rates, the RBI has empowered borrowers with the knowledge needed to make well-informed financial decisions.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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