Starting October 1, 2024, retail loan borrowers will have greater clarity on how much their loan actually costs with the help of key facts statement (KFS) to be issued by banks and non-banking financial companies (NBFCs).
The Reserve Bank of India (RBI) on Monday issued a directive that prohibits banks and other regulated entities from levying additional fees on loans that are not previously disclosed in the Key Fact Statement (KFS). The notification stipulates strict adherence to these guidelines for all new retail and MSME term loans sanctioned from October 1 onwards, including loans issued to existing customers.
“Any fees, charges, etc., which are not mentioned in the KFS, cannot be charged by the REs to the borrower at any stage during the term of the loan, without explicit consent of the borrower,” the regulator said.
“REs shall put in place the necessary systems and processes to implement the above guidelines at the earliest. In any case, all new retail and MSME term loans sanctioned on or after October 1, 2024, including fresh loans to existing customers, shall comply with the above guidelines in letter and spirit without any exception,” the notification further said.
What is a Key Fact Statement?
The KFS serves as a clear and comprehensible statement detailing the essential facts of a loan agreement. It is provided in a standardised format to aid borrowers in understanding their financial obligations. Notably, the KFS includes the Annual Percentage Rate (APR), which reflects the total annual cost of credit, encompassing both interest rates and all other associated charges.
What is annualised percentage rate (APR)?
Annualised percentage rate is the annual cost of credit to the borrower, which includes the interest rate and all other charges associated with the credit facility. Other charges include insurance charges, legal charges, any additional fees, and more.
The KFS will also have to provide a computation sheet of the APR, and the amortisation schedule of the loan over the repayment period.
In all cases wherever the lender is involved in recovering such charges, the receipts and related documents will have to be provided to the borrower for each payment. Any fees or charges which are not mentioned in the KFS cannot be charged by the regulated entity to the borrower at any stage during the term of the loan without the explicit consent of the borrower.
What is the equated periodic instalment (EPI) mentioned in the key facts statement?
It is an equated, or fixed, amount of repayments consisting of both the principal and interest components, to be paid by a borrower towards repayment of a loan at periodic intervals for a fixed number of such intervals; and which results in complete amortisation of the loan. EPIs at monthly intervals are called EMIs (equated monthly instalments). Given that retail loans typically involve repayment in monthly instalments, for individual borrowers, EPI simply means EMI.
How to locate your KFS?
Lenders are mandated to provide all borrowers with a clear, concise KFS at every stage of the loan processing as well as in the case of any change in terms and conditions.
Regulated entities shall provide a KFS to all prospective borrowers to help them take an informed view before executing the loan contract, as per the standardised format given on the RBI website.
The KFS shall be written in a language understood by the borrowers, the RBI directive says. Banks have to explain the contents of KFS to the borrower and obtain an acknowledgement to prove that the borrower has understood the same.
Will borrowers be granted a validity period to convey their acceptance after being provided with the KFS by the lender?
Yes, the borrower will have a validity period of at least three working days for loans having a tenor of seven days or more, and a validity period of one working day for loans having a tenor of less than seven days to agree to the terms of the loan agreement as mentioned in the KFS. The regulated entity will be bound by the terms of the loan indicated in the KFS if agreed to by the borrower during the validity period.
What are the benefits for borrowers?
KFS provides a standardised document with a prescribed approach to calculate APR. So, the KFS makes it easier for the borrower to compare offers from different lenders, irrespective of the loan tenure and types of charges involved.
If you do not receive the KFS or spot a discrepancy in the KFS, you can raise it with the lending company. “The first opportunity of grievance redressal is the lender’s internal ombudsman, who must settle such grievance within 30 days of receipt of the complaint,” says Sharma. If the grievance is not redressed to the satisfaction of the borrower, another grievance can be registered with the RBI’s Banking Ombudsman.
