1. Background
1.1. On April 15, 2024 the Reserve Bank of India ("RBI") released its notification on the Key Facts Statement ("KFS") for loans and advances ("KFS Notification"), aimed at harmonizing instructions related to the KFS. The objective is to enhance transparency and mitigate information asymmetry concerning financial products offered by commercial banks, primary urban cooperative banks, state cooperative banks, central cooperative banks, and all non-banking financial companies (including housing finance companies) (i.e., regulated entities ("REs")). The KFS Notification is likely to empower borrowers by enabling them to make more informed decisions.
2. Applicability and Exemption
2.1. Applicability: The KFS Notification shall be applicable for all new retail and micro, small and medium enterprise ("MSME") term loan products extended by all REs on or after October 01, 2024, including fresh loans to existing customers. Until then, the relevant provisions on KFS/ factsheet under the extant RBI guidelines shall be applicable.
2.2. Exemption: Credit card receivables are exempted from the provisions of the KFS Notification.
3. Important Definitions
3.1. Below-mentioned terms have been defined specifically in the KFS Notification. The terms that are not explicitly defined in the KFS Notification have been notified to have the same meaning as assigned to them in the Master Direction on Interest Rate on Advances, dated March 03, 2016 and any other relevant RBI regulation.
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Key Facts |
These are legally significant and deterministic facts of a loan agreement that satisfy basic information and are required to assist the borrower in taking informed financial decision. |
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KFS |
It means a statement of key facts of a loan agreement, written in simple and easy to understand language and provided to the borrower in a standardised format. |
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Annual Percentage Rate ("APR") |
It is the annual cost of credit to the borrower which includes interest rate and all other charges associated with the credit facility. |
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Equated Periodic Instalment ("EPI") |
It refers to 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 a periodic interval for a fixed number of such intervals; and which result in complete amortisation of the loan. EPIs at monthly intervals are called equated monthly instalments (EMIs). |
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Validity Period |
It refers to the period available to the borrower, after being provided the KFS by the RE, to agree to the terms of the loan. |
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Cooling off/ look- up period |
A borrower shall be given an explicit option to exit digital loan by paying the principal and the proportionate APR without any penalty during this period. The cooling off period shall be determined by the Board of the RE, subject to the period so determined not being less than one day. For borrowers continuing with the loan even after look-up period, pre-payment shall continue to be allowed as per extant RBI guidelines.1 |
4. Responsibility of REs
4.1. Provide KFS before execution of loan contract: REs shall provide the KFS to their borrowers before the execution of the loan contract, as per the standardised format provided in Annex A of the KFS Notification in a language understood by such borrowers.
4.2. Explanation and acknowledgement of KFS: REs shall explain the contents of KFS and take an acknowledgement from the borrower confirming their understanding of the terms of their KFS.
4.3. Adherence to KFS terms post-acceptance: Subsequent to the acceptance of the contents of the KFS by the borrower within the Validity Period, RE shall have to adhere to the terms mentioned in the KFS.
4.4. Provide receipt of charges: REs that are involved in the recovery of any of the charges mentioned in the APR shall provide the borrower receipts and documents related to payment of every charge, within a reasonable time.
4.5. Restriction on charges not mentioned in KFS: REs shall not charge the borrower any fees, charges, etc., which are not mentioned in the KFS, at any stage during the term of the loan, without explicit consent of the borrower.
4.6. Inclusion of KFS in loan agreement: REs shall include the KFS as an exhibit in the loan agreement.
5. Contents of KFS
5.1. KFS to be as per the standardised format: KFS needs to be in a standardised format given in Annex A of the KFS Notification.
5.2. Unique personal number: KFS should contain a unique personal number.
5.3. Validity Period: KFS should specify a Validity Period of at least 3 (three) working days for loans having a tenor of 7 (seven) days or more and 1 (one) working day for loans having a tenor of less than 7 (seven) days, for each KFS.
5.4. APR computation and repayment schedule: KFS shall be required to include a computation sheet of APR and an amortisation/repayment schedule of the loan over the loan tenor, as per the illustrations given in Annex B and Annex C of the KFS Notification.
5.5. Loan charges: Applicable interest rates, charges, including the charges that shall be recovered by RE on behalf of third-party service providers on actual basis, such as insurance charges, legal charges, etc., should form part of the APR computation included in the KFS.
Scope Limitation: The note is based on the public information and information obtained from Directions, Notifications and Circulars issued by regulatory bodies and is inclusive of the judicial and administrative interpretations thereof prevailing up to and inclusive of the date of this opinion.
Footnote
1. In view of the definition of the 'Validity Period' the provision of paragraph 8 of the 'Guidelines on Digital Lending' relating to cooling off/ look up period, shall be updated with the new definition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
