RBI Makes It Compulsory For Banks, NBFCs To Issue KFS With Loans, Here’s How It Can Benefit Borrowers

The Reserve Bank of India (RBI) has made it compulsory for all banks and non-banking financial companies (NBFCs) to issue a Key Fact Statement (KFS) to their retail and micro, small and medium enterprise (MSME) borrowers. The central bank has called for its immediate implementation, although it was announced way back in February 2024, and the circular was officially released on October 1, 2024.

The sole motive for the introduction of the KFS was to combat “information asymmetry” in the credit market. Complicated legal terminology and hidden charges had kept borrowers in the dark about precisely what they paid for, year after year. In an effort to level the field so that loan disclosures are uniform from any lender, RBI introduced this measure as a means of making financial products more comprehensible for borrowers to make decisions based on facts rather than marketing claims.

The Significance of APR

The annual percentage rate (APR) is the central component of KFS. While most lenders were merely quoting the nominal interest rate, the APR conveys more accurately to the customer the real cost of credit. The APR includes the base interest rate along with all other compulsory costs, such as processing fees, documentation charges, and insurance premiums.

For instance, a lender may offer a borrower a loan at a rate of interest of 10 per cent, but after adding the processing fees and administration cost, the APR may rise to 11.50 per cent. The KFS demands that such a total percentage be clearly stated. This would allow the borrower to make an effective comparison between two loan offers, since a loan with a lower rate of interest but higher fees may present a higher APR than one with a slightly higher rate of interest but no fees.

Transparency in Fees and Penalties

The KFS does more than just provide the rate of interest on a loan; it gives a detailed breakdown of the entire loan structure. It includes the total amount to be paid over the life of the loan, the number of instalments, and specific dates for repayment. 

Apart from the recurring expenses, the quote should also enumerate contingent expenses. These are charges that apply only under certain circumstances, such as:

• Penalties for late payment.

• Charges for alteration in loan tenure.

• Fees for paying back the loan prior to its due date.

Having all these figures in one table avoids the surprise of hidden costs to the borrower later in the cycle. According to RBI guidelines, any fee not mentioned in the KFS cannot be levied on the borrower unless explicit consent is obtained. These documents must be provided in a language that the borrower can understand.

Standardising the Comparison Process 

KFS also has a validity period, in order to give borrowers ample time to consider their choices. In cases where the tenure of the loan is seven days or more, the offer in the KFS is valid for at least three working days. This period, therefore, gives the borrower time to consult with family or compare terms with other financial institutions without the apprehension that the interest rate will increase at any moment. This regulatory framework aims to create a level playing field in the credit market.

Since all lenders are not mandated to use the same format, consumers can take two statements and place them side by side to see which one offers a better deal. As this brings out complete transparency, it also encourages healthy competition among lenders and helps protect consumers from lending practices that rely on obscured costs.