RBI Asks Banks, HFCs To Provide Simple Key Fact Statements to Borrowers on Loan Terms, Interest and Charges

Moneylife Digital Team 16 April 2024

Investor Interest

The Reserve Bank of India (RBI) has asked all banks and housing finance companies (HFCs) to provide key fact statements (KFS) in simple terms to the prospective borrowers on the loans and interest that they are expected to pay to ensure transparency and help them make informed decisions.

"This would provide critical information about the terms of the loan agreement, including all-inclusive interest cost, which will greatly benefit the borrowers in making an informed decision. The KFS shall be written in a language understood by such borrowers. Contents of KFS shall be explained to the borrower, and an acknowledgement shall be obtained that he/she has understood the same," RBI says in the notification .

Further, RBI says the KFS should be provided with a unique proposal number and a validity period of at least three working days for loans with a tenor of seven days or more, and a validity period of one working day for loans with a tenor of less than seven days.

According to the RBI notification, the KFS will also include a computation sheet of the annual percentage rate (APR) and the amortisation schedule of the loan over the tenor. APR will consist of all charges levied by the regulated entities (REs).

RBI says charges recovered from the borrowers by the REs on behalf of third-party service-providers on an actual basis, such as insurance charges and legal charges, should also form part of the APR and 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. Any fees and charges, 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."

The KFS should also be included as a summary box to be exhibited as part of the loan agreement, RBI added.

The central bank has asked all REs to implement the necessary systems and processes to implement the above guidelines as soon as possible. In any case, all new retail and MSME term loans sanctioned on or after 1 October 2024, including fresh loans to existing customers, should comply with the above guidelines in letter and spirit without any exception.

In the recent past, RBI announced several measures to foster greater transparency and disclosure by the REs in the pricing of loans and other charges levied on the customers. One such measure is the requirement for lenders to provide their borrowers with a 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, KFS is specifically mandated with respect to loans by scheduled commercial banks to individual borrowers, digital lending by REs, microfinance loans and loans by non-banking finance companies (NBFCs) for all retail and MSMEs.

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