RBI mandates key fact statement for retail, MSME loans

The Reserve Bank of India has mandated the requirement of issuing a Key Fact Statement, detailing cumulative charges and interest charged by lenders, for retail and MSME loans.

“It has been decided to mandate all REs to provide the ‘Key Fact Statement’ (KFS) to the borrowers for all retail and MSME loans. Providing critical information about the terms of the loan agreement, including all-inclusive interest cost, will greatly benefit the borrowers in making an informed decision,” said the central bank.

In the policy conference, Governor Shaktikanta Das said it’s not that lenders don’t provide this information, but most readers either don’t pay attention or understand these terms. “So, we mandated a simple KFS in customers interest. I’m sure banks are also interested and will encourage it because they are long-term players and not short-term operators,” he said.

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Manish Shah, MD and CEO, Godrej Capital, said: “This is an opportunity to enhance customer awareness and improve their loan experience by highlighting essential loan aspects. The initiative not only fosters transparency for MSME borrowers, but also equips them to make well-informed decisions.”

At present, loans and advances availed by borrowers, apart from the rate of interest, also include other fees and charges such as processing fees and documentation charges. To enhance transparency in disclosure of such information, the RBI has mandated a KFS, which will need to include essential information such as the all-inclusive annual percentage rate (APR) and recovery and grievance redress mechanism, in a simple and easy to understand format.

“This disclosure, which was already applicable to digital loans and microfinance loans of non-banks, will improve transparency and allow borrowers to make informed decisions when seeking a loan. The mandate will be specifically relevant for shorter-tenure loans, which have relatively higher upfront processing fees but competitive interest rates,” said Ajit Velonie, Senior Director, Crisil Ratings, adding that it will also bring consistency to norms across asset classes.

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KFS requirement

Earlier, the KFS requirement pertained only to certain categories of lenders, specifically loans by scheduled commercial banks to individual borrowers, digital lending and microfinance loans.

HP Singh, CMD, of NBFC-MFI Satin Creditcare Network, said KFS norms have so far significantly enhanced transparency, empowered borrowers, and contributed to broader financial inclusion efforts in the microfinance sector.

“This [extending the scheme] will enable borrowers to fully understand the terms and conditions of their loans and make effective comparisons between different loan products,” he said, adding that it also nudge borrowers to be more prudent, ensure lenders perform effective due diligence, and also bolster financial literacy and awareness as borrowers become familiar with key loan and financial terms.

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