RBI Directs Lenders to Issue Key Facts Statement to Borrowers

In a move aimed at fostering transparency and empowering borrowers to make well-informed financial decisions, the Reserve Bank of India (RBI) has issued a circular dated April 15, 2024, regarding the Key Facts Statement (KFS) for Loans and Advances. This directive stems from the decision announced in the Statement on Developmental and Regulatory Policies dated February 8, 2024, to harmonize instructions on this matter. The harmonised instructions shall be applicable in cases of all retail and MSME term loan products extended by all regulated entities (REs).

Key highlights of the directive include:

  • REs are mandated to furnish a KFS to all potential borrowers, aiding them in evaluating loan terms before finalizing the agreement. The statement is to be provided in a standardized format outlined in Annex A.
  • The KFS will be assigned a unique proposal number and must remain valid for a minimum of three working days for loans with a tenor of seven days or more, and one working day for loans with a tenor of less than seven days.
  • Additionally, the KFS must feature an annual percentage rate (APR) computation sheet and an amortization schedule for the loan’s entire tenor. The APR should encompass all charges imposed by the RE. Examples of APR calculation and repayment schedule disclosure are provided in Annex B and C, respectively.
  • Charges collected by REs from borrowers on behalf of third-party service providers, such as insurance or legal fees, will be included in the APR and must be disclosed separately. REs must furnish borrowers with receipts and related documentation for each payment made within a reasonable timeframe.
  • Any fees or charges not delineated in the KFS cannot be imposed by REs on borrowers throughout the loan term without the explicit consent of the borrower.

Regulated entities (REs) are instructed to promptly establish the necessary systems and procedures to enact the aforementioned guidelines. Effective from October 1, 2024, all new retail and MSME term loans, including those extended to existing clients, must adhere strictly to these guidelines without exception.

In the interim period, the existing provisions regarding ‘KFS/Factsheet’ outlined in the extant guidelines, along with the ‘Guidelines on Digital Lending’, the Master Direction on ‘Regulatory Framework for Microfinance Loans’, and the circular on ‘Display of Information by Banks’, will remain in force.

These directives shall not apply to credit card receivables. This directive underscores the RBI’s commitment to enhancing transparency and fairness in the lending process, ensuring borrowers have access to clear and comprehensive information to facilitate informed decision-making.