The Reserve Bank of India (RBI) has announced transparency measures for borrowers on other charges that are levied by the lending institutions on taking a loan, apart from interest rates. As per the announcement made, all lending institutions are now required to provide all the charges (like processing fees and documentation charges etc.) that are actually loaded into the interest rate on a loan in the Key Fact Statement (KFS). This move will give borrowers information about the actual annualized interest rate that they pay on the loan. It will cover not only digital lending apps but also all the banks and NBFCs (Non-banking Finance companies) on all retail and MSMEs loans.

The move is one of the measures to enhance the customer centricity and also to enhance transparency measures. The possibility of levying any hidden charges by a lender on a loan will be greatly reduced because of this. The actual annualised interest rate will also include one-time charges and other charges that are levied by the banks and NBFCs.

While announcing the move the RBI Governor 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 disclosure of such information, the Reserve Bank had mandated certain categories of lenders to provide the borrower 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 in making informed decisions."

As per the Statement on Developmental and Regulatory Policies issued by the RBI today, "The Reserve Bank has announced several measures in the recent past to foster greater transparency and disclosure by the regulated entities (REs) in pricing of loans and other charges levied on the customers. One such measure is the requirement for lenders to provide their borrowers a Key Fact Statement (KFS) containing the key information regarding a loan agreement, including all-in-cost of the loan, in simple and easy to understand format. Currently KFS is specifically mandated in respect of loans by scheduled commercial banks to individual borrowers; digital lending by REs; and microfinance loans. 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 cost, shall greatly benefit the borrowers in making an informed decision."

Adhil Shetty, CEO & Co-Founder, BankBazaar says, " This is a welcome extension from personal loans to MSME loans. In 2023, the RBI had provided guidance on penal charges to be clearly disclosed in the KFS. The KFS must include all must-know details of the loan in a templatised format for the borrower. It should mention the Annual Percentage Rate, processing fees, penalties, various loan charges etc. A KFS was mandatory for individual loans. Now, all regulated entities must provide the KFS to all retail and MSME borrowers."

Abhiroop Medhekar, Founder and CEO, Velocity, a cash-flow based financing platform says, "The decision to extend Key Fact Statement (KFS) requirements to all lenders will enhance transparency for retail and MSME borrowers. This move also levels the playing field between traditional institutions and digital lending platforms, which were already mandated to provide KFS. KFS will clearly inform borrowers about the fully loaded actual cost of borrowing and eliminate hidden charges. We expect this move to enhance borrowers’ trust in the lending ecosystem and empower them to make informed decisions about their loans."

WHAT IS KEY FACT STATEMENT?

The Key Fact Statement, also known as KFS, is a document issued by the banks and NBFCs to prospective borrowers informing them about all the terms and conditions, charges and interest rates of the loan. It is a simple and easy-to-understand document issued to prospective borrowers to make an informed decision before taking a loan.

The RBI asked banks to issue KFS from April 1, 2015 via their January 2015 circular. As per the January 2105 circular, "Banks should provide a clear, concise, one-page key fact statement/fact sheet, as per the prescribed format, to all individual borrowers at every stage of the loan processing as well as in case of any change in any terms and conditions. The same may also be included as a summary box to be displayed in the credit agreement."