The Reserve Bank of India issued instructions on Monday extending the requirement of a key fact statement to all retail and MSME loans. Through this, the regulator aims to enhance transparency and reduce information asymmetry on financial products, if any. A KFS essentially comprises the important facts of a loan agreement, presented in simple and easy language. It is given to a borrower in a standardised format to help them make an informed decision.
According to the new circular, the following rules apply for a KFS:
While all regulated entities have to provide a KFS to new retail and MSME borrowers, they also have to explain the contents to them.
Following this, REs will have to obtain an acknowledgement from the borrower that they have understood it.
Every KFS will have a unique proposal number. It must have a validity period of at least 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.
KFS to have a computation sheet of the annual percentage rate and amortisation schedule of the loan over its tenor.
This APR must include all the charges that will be levied by the entity. In addition, all charges recovered from borrowers on behalf of third-party service providers will also be included and disclosed.
However, these regulated entities won't be able to charge any fees/charges that are not mentioned in the KFS.
The regulator also said that credit card receivables will, however, be exempted from these provisions.
The new instructions come in response to RBI's announcement of a KFS for all retail and MSME loans in February's monetary policy address. Back then, Governor Shaktikanta Das said that, at present, loans also include fees and charges other than the rate of interest. Hence, to avoid loading such charges at the actual interest rate, the requirement of KFS has been extended.
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