The Reserve Bank of India (RBI) has issued a comprehensive directive requiring all commercial banks, regional rural banks, cooperative banks, and non-banking financial companies, including housing finance firms, to implement a standardized Key Facts Statement (KFS) for all loans and advances. This requirement, outlined in a RBI circular is aimed at improving transparency and enabling consumers to make informed financial decisions.
The new policy mandates that effective from October 1, 2024, all regulated entities (REs) must provide prospective borrowers with a KFS that details critical information about the loan in a clear and understandable format. The KFS will include the Annual Percentage Rate (APR), equated periodic instalments (EPIs), and a full disclosure of any associated charges.
Annual Percentage Rate (APR) is the annual cost of credit to the borrower which includes interest rate and all other charges associated with the credit facility.
Equated Periodic Installment (EPI) 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.
Further, the KFS shall be provided with a unique proposal number and shall have a validity period of at least three working days for loans having tenor of seven days or more, and a validity period of one working day for loans having tenor of less than seven days
This ensures that all charges and terms are explicitly agreed upon, enhancing consumer protection.
This initiative follows the RBI’s goal to reduce information asymmetry and prevent potential misunderstandings between lenders and borrowers. It builds on previous regulations, including those governing microfinance and digital lending, to create a unified framework that covers all forms of retail and MSME lending.
The KFS will be part of the loan agreement and it must be written in language that is easy to understand by the borrower. REs are also required to ensure that the contents of the KFS are thoroughly explained to the borrower, and acknowledgement is obtained that the borrower comprehends these terms.
