The Reserve Bank of India (RBI) announced on April 15, 2024, that from October 1, 2024, all lenders will be required to provide a Key Facts Statement (KFS) to borrowers, detailing loan agreement terms, for all retail and MSME loans. Key Facts Statement (KFS) is a statement of key facts of a loan agreement, in simple and easier-to-understand language, provided to the borrower in a standardised format. The loan agreement terms will include the all-inclusive interest cost, type (fixed floating or hybrid), annual percentage charge (APR) etc. Currently, KFS is mandatory only for loans extended by commercial banks to individual borrowers RBI-regulated digital lenders and microfinance lenders. Any fees, charges, etc. which are not mentioned in the KFS, cannot be charged to the borrower unless his or her explicit consent is obtained.
Other Rules
All Charges recovered from the borrowers by the REs on behalf of third-party service providers such as insurance charges, legal charges etc., will also be disclosed under APR and shall be disclosed separately. When recovering such charges, the receipts and related documents shall be provided to the borrower for each payment, within a reasonable time.
The KFS shall also include a computation sheet of the annual percentage rate (APR) and the amortisation schedule of the loan over the loan tenor. APR will include all charges which are levied by the RE.
The RBI stated that the decision to harmonise KFS instructions on loans and advances aims "to enhance transparency and reduce information asymmetry on financial products being offered by different regulated entities, thereby empowering borrowers to make an informed financial decision." This circular does not apply to credit card receivables."
Fair Lending Rules
Key Facts Statement and its importance have recently featured in the revised fair lending practices of the Reserve Bank of India (RBI) effective from April 1, 2024. RBI had maintained in the fair lending practice that banks and non-banking financial companies (NBFCs) cannot charge penalties for non-payment of EMIs as additional interest rates but only implement penalties as penal charges. These rules prohibit banks and NBFCs from using penal interest as a revenue generation tool. All financial institutions must prominently display such penal charges on their websites under the 'Interest rates and Service charges' section in the 'Key Fact Statement'.
