RBI have laid down comprehensive guidelines on the disclosure of essential information regarding loans and advances. One of the pivotal tools in achieving this objective is the Key Facts Statements.
Mandatory Disclosure
Regulated entities (REs) are mandated to provide a KFS to prospective borrowers before the execution of a loan contract. This document, outlined in Annex A of the guidelines, must be comprehensible to borrowers. Furthermore, REs are obligated to ensure that borrowers understand the contents of the KFS, obtaining acknowledgment thereof.
Validity and Comprehensiveness
The KFS comes with a validity period, providing borrowers with sufficient time to consider the terms of the loan. During this period, the terms indicated in the KFS bind the RE, subject to the borrower’s agreement. Moreover, the KFS includes a computation sheet of the APR and an amortization schedule, aiding borrowers in understanding the total cost of credit and repayment structure over the loan tenor.
Incorporating Third-party Charges
To ensure transparency, charges collected from borrowers by REs on behalf of third-party service providers, such as insurance or legal charges, are incorporated into the APR and disclosed separately. Borrowers must receive receipts and related documents for these charges promptly.
Prohibition of Hidden Fees
Any fees or charges not explicitly mentioned in the KFS cannot be levied by REs without the explicit consent of the borrower. This provision safeguards borrowers against unexpected financial obligations throughout the loan term.
Summary Box in Loan Agreements
The KFS is also required to be included as a summary box within the loan agreement, providing borrowers with easy access to essential loan details.
Exemptions and Implementation
While credit card receivables are exempted from these provisions, REs must implement the guidelines for all new retail and MSME term loans sanctioned on or after October 1, 2024. Necessary systems and processes should be in place to ensure compliance with the guidelines.
Legal Framework
These instructions are issued under various sections of banking and regulatory acts, reinforcing their legal enforceability and significance in the financial landscape.
