Customer First: RBI Mandates Key Facts Statement For Loans: A Step Towards Transparent Borrowing

RBI's directive mandating the Key Facts Statement for loans signals a step towards empowering borrowers, promoting financial inclusivity and reduces symmetry on financial product.

The Reserve Bank of India (RBI) has issued a circular on 15th April 2024, mandating all banks and finance companies to provide borrowers with a Key Facts Statement (KFS) effective from October 1st, 2024. The RBI states that “in order to enhance transparency and reduce information asymmetry on financial products being offered by the different regulated entities, thereby empowering borrowers for making an informed financial decision.” This statement encompasses crucial data regarding fees, the annual cost of credit, and other essential loan information. The RBI's directive underscores its commitment to fostering a fair and informed lending environment and is applicable to all retail loans and MSME, term loan products, (credit card receivables are exempted).

The Key Facts Statement (KFS) is a comprehensive document designed to offer borrowers a clear understanding of the terms and conditions associated with their loans. It encapsulates vital information such as the Annual Percentage Rate (APR), which delineates the annual cost of credit inclusive of interest rates and all additional charges associated with the credit facility. Furthermore, it requires the policy concerning recovery agents, grievance redressal mechanisms, and the possibility of loan transfer to other entities to be clearly mentioned.

The banks are mandated to provide a KFS to all borrowers/perspective borrowers to enable the borrowers to take an informed decision on availing the credit facility. RBI has also prescribed that the KFS should have a unique proposal number written and in simple language capable of being understood by the Borrower. There is also a validity period prescribed aligned with the tenor of the loan - which is a period available to the borrower to agree to the terms of the loans. A standard format is provided with the Notification.

One of the groundbreaking aspects of this directive is the inclusion of the APR, which enables borrowers and aggregators to compare the overall cost of loans from different lenders effectively. By incorporating all charges, including those levied by third-party service providers such as insurance and legal fees, into the APR, the RBI ensures transparency and eliminates hidden costs. Receipts for payments to such third parties is to be given to the Borrower.

The RBI's decision to introduce the KFS stems from its ongoing efforts to bolster transparency in the lending space. The RBI has been progressively enhancing transparency requirements for various lending institutions for quite a while. This recent directive further aligns with the RBI's strategic objectives, as articulated in its Statement on Developmental and Regulatory Policies.

To facilitate seamless implementation of this process, the RBI has outlined specific guidelines for Registered Entities (REs) to follow. Any fees or charges not mentioned in the KFS cannot be imposed on borrowers without their explicit consent, safeguarding borrowers against unexpected financial obligations. The KFS is also integrated into the loan agreement as a summary box, enhancing its accessibility and visibility for borrowers.

RBI's directive mandating the Key Facts Statement for loans signals a step towards empowering borrowers, promoting financial inclusivity and reduces symmetry on financial product. By equipping borrowers with comprehensive information and fostering transparency in lending practices, the RBI reinforces its commitment to fostering a fair and conducive financial environment for all stakeholders.