RBI released a very important circular on April 15, 2024 about Key Facts Statement (KFS) for loans and advances. The circular aims to enhance transparency in the loan costs and charges for the retail borrowers.
Usually, the loan agreements have all the information about various costs and charges, but loan agreements are lengthy documents, and the language is not easy to understand. Hence, most borrowers would tend to skip this and hence may not have complete information about the various costs.
The Reserve Bank is aware of this problem and has hence mandated banks to furnish Key Facts Statement (KFS) to prospective borrowers before the loan agreement is signed. The Reserve Bank has been talking about KFS for quite some time. However, this time around, the RBI has come out with a specific format for KFS that all banks and NBFCs must follow.
What Is a Key Facts Statement (KFS)?
Key Fact Statement is a quick summary about the important aspects about your loan.
Loan amount, Rate of interest, Loan Tenure, EMI (or EPI*), all the additional costs and charges, effective cost of loan, amortization schedule etc. We will discuss this in detail in a subsequent section of this post.
*EPI stands for Equated Periodic Installment. The loan installment may have a frequency other than monthly. If the payment frequency is monthly, this becomes EMI.
When Should the Bank Give You the Key Facts Statement (KFS)?
The Bank must provide the Key Facts Statement to the prospective borrower before the execution of the loan agreement. This is very useful. It is important to understand the various costs of the loan before (and not after) you sign the dotted line.
What Kind of Loans Does This Circular Apply or Does Not Apply To?
- To all retail and MSME loans sanctioned after October 1, 2024, including fresh loans to existing customers. Loans extended by commercial banks, co-operative banks, NBFCs, and HFCs.
- The applicability is broad-based. Applies to all kinds of retail (including but not limited to personal, car, home, and education loans) and MSME loans. This is also the section of borrowers that are likely to be misled by the lenders.
- Does not apply to credit card receivables.
What Information Does Key Facts Statement Have?
Fortunately, the Reserve Bank has provided the format in the annexure to the circular, leaving little scope for ambiguity and discretion.
- Loan Proposal Number: This uniquely identifies you and the loan proposal under question. (I suppose that will be uniquely linked to your loan. If the agreement wordings say anything contrary to the loan proposal, you can take recourse under the loan proposal and present your case).
- Type of Loan
- Sanctioned loan amount
- Disbursement schedule: Whether disbursement is in stages or 100% upfront. If the loan must be disbursed in stages, this section must provide relevant clauses in the loan agreement where the terms and conditions of the disbursal are mentioned.
- Installment details
- Type of installment: I guess frequency of payment shall be mentioned here.
- Number of Installments or EPIs
- Installment amount or EPI: Note that if the payment frequency is monthly, EPI becomes EMI.
- Date of commencement of payment
- Interest rate and type (fixed/floating)
- Additional information if the rate is a floating rate loan: This section would tell you about the loan benchmark and the applicable spread and their reset periodicity. Additionally, this would also tell you how your EPI (EMI) or the remaining installments would go up and down with change in the rate of interest.
- Fees and charges: This section would list down all the charges.
- Nature and nomenclature of charge (processing fee/valuation charges/insurance cost etc)
- Whether it is one-time or recurring
- Fixed amount or as % of loan amount
- Payable to a lender or a third party.
- Annual Percentage Rate (APR): This is the most important disclosure and really increases transparency. The banks may tend to keep the interest rate low and impose costs through ancillary charges such as processing fee etc. Such charges increase the effective cost of loan for the borrower. Now, as a borrower, if you focus on merely the interest cost, you may be misled. A bigger problem is that not many know how to calculate the effective cost of a loan considering all the charges. Worry no further. Now, the banks will be required to share all-inclusive cost to the borrower (inclusive of even third-party charges) in the APR section. The RBI has also added another section to show how APR must be calculated.
- Details of any contingent charges (penal charges, foreclosure charges, switching costs, etc).
- Amortization schedule of the loan
- Clause of the loan agreement pertaining to recovery of loans through recovery agents
- Clause of the loan agreement that details grievance redressal mechanism
- Phone no. and email id of the Nodal Officer
- Digital loans: There are separate guidelines for Digital lending by the Reserve Bank of India. However, this RBI circular mandates the mention of cooling off period in the KFS. Cooling off (look-up) period is the time given to the borrower to exit the loan by paying off the principal and the proportionate interest cost without incurring any penalty. This is important because, in a digital loan, things may happen so fast that you may realize what you signed up for after loan issuance. As per digital lending guidelines, the cooling off period must not be less than 3 days for loans with tenure of 7 days or more. And not less than a day for loans with tenure of less than 7 days.
Points to Note
- The KFS shall also be included as a summary as part of the loan agreement itself.
- Charges recovered by lenders on behalf of third party (insurance charges, legal charges etc) shall also be considered during APR calculation. And the receipt and related documents shall be provided to the borrowers within reasonable time. Again, this increases transparency.
- Any fee/charges/cost not mentioned in the KFS cannot be charged to the borrower without his/her explicit consent.
- The lenders may indicate charges net of GST cost. Most likely, the lenders will write pre-GST charges.
- It is not clear whether the APR calculation would consider charges with GST or before GST.
Annual Percentage Rate (APR) Calculation
The Key Facts Statement (KFS) shall include a computation sheet for APR calculation and must also include the loan amortization schedule. The RBI has provided the template for both these pieces of information.
As you can see in the illustration from the circular, the charges increase the effective cost of loan from 15% p.a. (interest rate) to 17.07% p.a. As I understand, the costs/charges are considered before GST. Hence, the effective cost of loan will be even higher.
Do you think this circular is customer-friendly? I certainly think it is.