The Reserve Bank of India (RBI) announced transparency measures for borrowers regarding other charges levied by lending institutions on loans, apart from interest rates. According to the announcement, all lending institutions must now include charges such as processing fees, documentation charges, etc., in the Key Fact Statement (KFS), which reflects the actual loaded interest rate on a loan. This move enables borrowers to access information about the actual annualized interest rate they pay on the loan. It applies to digital lending apps and all banks and Non-banking Finance Companies (NBFCs) offering retail and MSMEs loans.
RBI Mandate Enhances Transparency in Loan Disclosure
As part of measures to enhance customer centricity and transparency, lending institutions must now disclose all charges, including processing fees and documentation charges, in the Key Fact Statement (KFS) and the actual annualized interest rate. This move significantly reduces the possibility of lenders imposing hidden charges on loans.
RBI Governor stated,
“To enhance transparency in disclosure of such information, the Reserve Bank has 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.”
RBI Mandates’ Key Fact Statement’ (KFS) for All Retail and MSME Loans
In its Statement on Developmental and Regulatory Policies, the RBI announced measures to enhance transparency and disclosure by regulated entities (REs) in loan pricing and other charges. One such measure is the requirement for lenders to furnish borrowers with a Key Fact Statement containing essential loan agreement details, including the all-in-cost of the loan, in a simple format.
Previously, KFS was mandated for loans by scheduled commercial banks to individual borrowers, digital lending by REs, and microfinance loans. Now, all REs are required to provide a KFS to borrowers for all retail and MSME loans. This initiative aims to provide critical information about loan terms, including the all-inclusive interest cost, benefiting borrowers.
BankBazaar CEO Applauds Extension of Key Fact Statement to MSME Loans
Adhil Shetty, CEO & Co-Founder of BankBazaar, welcomes the extension of the Key Fact Statement (KFS) from personal loans to MSME loans. In 2023, the RBI issued guidance on penal charges to be disclosed in the KFS. The KFS must include all essential loan details in a templated format for the borrower, covering the Annual Percentage Rate, processing fees, penalties, and other loan charges. While previously mandatory for individual loans, all regulated entities must provide the KFS to all retail and MSME borrowers.
Velocity CEO on the Extension of Key Fact Statement to All Lenders
Abhiroop Medhekar, Founder and CEO of Velocity, a cash-flow-based financing platform, praises the decision to extend Key Fact Statement (KFS) requirements to all lenders, which 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 inform borrowers about the fully loaded actual cost of borrowing and eliminate hidden charges. This move is expected to enhance borrowers’ trust in the lending ecosystem and empower them to make informed loan decisions.
Key Fact Statement (KFS)
The Key Fact Statement is a document issued by banks and NBFCs to inform prospective borrowers about all the terms and conditions, charges, and interest rates associated with a loan. It is a simple and easy-to-understand guide for borrowers to make informed decisions before committing to a loan.
The RBI mandated banks to issue KFS from April 1, 2015, through its January 2015 circular. According to the circular, banks must provide a transparent, concise, one-page key fact statement/fact sheet in a prescribed format to all individual borrowers at every stage of the loan processing and in case of any changes in terms and conditions. Additionally, the KFS may also be included as a summary box to be displayed in the credit agreement.