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“The customer knows that the loan carries interest of a certain percentage. But there are other changes, fees, etc. that he pays in advance. Now, that also needs to be loaded into the actual interest rate so that the customer has a clear idea what is the actual annualized interest rate you pay,” Shaktikanta Das said.
For this, the Key Facts Statement (KFS) should include such details for greater transparency for borrowers, the RBI governor said. The need for a KFS is extending to all retail lending and MSMEs, which in turn will bring transparency in lending, he said.
“To enhance transparency in disclosure of such information regarding various charges, fees etc., the Reserve Bank of India had directed the category of crayon lenders to provide the borrower with a statement of key facts containing essential information , such as all-inclusive APR and also details of the “Grievance Redressal and Recovery Mechanism. The KFS requirement is now being expanded to cover all retail and MSME loans. “This move will lead to greater transparency in lending and enable customers to make informed decisions,” he said.
Below is the full statement on what the RBI governor said:
“The Reserve Bank has announced several measures in the recent past to encourage greater transparency and disclosure by regulated entities (REs) in loan pricing and other charges applied to customers. One such measure is the requirement that lenders provide their borrowers with a Key Fact Statement (KFS) that contains key information about a loan agreement, including the total cost of the loan, in a simple, easy-to-understand format. Currently, the KFS is mandated specific with respect to loans provided by scheduled commercial banks to individual borrowers; digital loans by REs and microfinance loans. Now, it has been decided to direct all REs to provide the “Key Fact Statement” (KFS) to the borrowers for all retail and MSME loans. Providing critical information on the terms of the loan agreement, including the cost of interest, will greatly benefit borrowers in making an informed decision,” he said.
How will borrowers benefit?
Atul Monga, CEO and co-founder of BASIC Home Loan, says the RBI’s move will provide several benefits to borrowers, both existing and new. “First of all, there will be greater transparency. Borrowers will receive direct and transparent information about all fees associated with their loans. This eliminates any hidden charges and allows for easier comparison between different loan options,” he tells TOI.
“Second, by obtaining detailed information about loan costs, terms and conditions, borrowers can make more informed decisions. Having a clear understanding of all the costs involved from the beginning will help borrowers better plan and budget for loan repayment. In addition, transparency in loan terms could encourage competition among lenders, resulting in more favorable terms and lower costs for borrowers. Furthermore, this initiative protects against potential deceptive practices, ensuring that borrowers are fully aware of the financial commitment they are making,” he adds.
Vivek Iyer, partner at Grant Thornton Bharat, says issuing key data disclosures to borrowers will help them have complete information about their loan in terms of loan amount, interest rate, interest rate, collateral details and all kinds of fees charged. them as clients throughout the life cycle of the loan. In fact, the RBI has specified a format of the same in its January 2015 guidelines.
What will the Key Facts Statement (KFS) cover?
According to Atul Monga, the KFS will describe the applicable interest rates and how they are calculated and implemented. You will also disclose all fees and charges associated with the loan, including processing fees, prepayment charges, late payment penalties, and any other relevant charges. In addition, the KFS will clearly state the key terms and conditions of the loan.
Other relevant details related to the loan, such as the maximum or minimum limit, payment structure, frequency of payments, guarantees (if any), and the mandatory insurance policy associated with the loan (if any), They will also be detailed in the KFS.
Vivek Iyer states that KFS is nothing more than a simple disclosure document that captures all the financial parameters of your credit position such as interest, fees, EMI, loan amount, loan collateral, loan type, etc. A total of 10 aspects are required to be disclosed as per RBI format in KFS.