RBI Mandates Key Fact Statements for Loan Transparency

In a bid to assist borrowers in understanding loan terms and upholding regulatory standards, the Reserve Bank of India (RBI) has directed all lenders to provide Key Fact Statements (KFS) effective from October 1, 2024.

The KFS initiative aims to protect retail and MSME borrowers by offering clear, comprehensive details on loan agreements, including all charges from the lender and third-party service providers. This move emphasizes full disclosure to borrowers, ensuring transparency and fairness.

According to industry experts, standardizing procedures and ensuring compliance across regulated entities (REs) will promote uniformity and clarity in loan contracts.

“The KFS should be in a language understood by borrowers. Its contents must be explained, and borrowers’ understanding should be acknowledged,” stated RBI in its notification.

Shikhar Aggarwal, Chairman of BLS E-Services, highlighted that KFS will empower borrowers to make informed decisions, contributing to a more equitable lending environment.

This initiative underscores the importance of informed decision-making by highlighting loan costs, terms, conditions, and foreclosure charges. With KFS, borrowers will have essential information to understand their financial commitments.

Currently, KFS is mandated for loans by scheduled commercial banks to individuals, digital lending by REs, microfinance loans, and loans by NBFCs for retail and MSMEs. Prashant Muddu, CEO & MD of Jocata, believes that these guidelines will boost credit demand from MSME borrowers, promoting financial inclusion.

The KFS will also include the computation of the annual percentage rate (APR) and loan amortization schedule, ensuring borrowers have a clear repayment plan. Charges from third-party service providers will be part of the APR, enhancing transparency and protecting borrowers from unexpected fees.

RBI’s proactive approach in safeguarding borrowers and promoting responsible lending underscores its commitment to fostering a customer-centric lending ecosystem.