The Reserve Bank of India (RBI) has announced a new measure to increase the transparency and fairness of lending practices for retail and MSME borrowers. The RBI has mandated that all regulated entities, such as banks and NBFCs, provide a Key Fact Statement (KFS) to their customers before signing a loan agreement. The KFS is a simple and easy-to-understand document that contains the key information about the loan, such as the interest rate, processing fees, documentation charges, and the all-in-cost of the loan.
Benefits of KFS for borrowers
The KFS will help borrowers make informed decisions and compare different loan offers from different lenders. The KFS will also prevent potential cases of mis-selling and predatory pricing by unscrupulous lenders. The KFS will enhance the financial literacy and awareness of retail and MSME borrowers, who often lack adequate information or guidance on availing credit.
According to a report by TransUnion CIBIL, the demand for MSME loans increased by 1.7 times in Q2 FY 2023 compared to Q1 FY 2023, indicating a strong recovery in the sector post the Covid-19 pandemic. The report also stated that the average ticket size of MSME loans increased by 8% year-on-year in Q2 FY 2023, reaching Rs. 1.8 lakh. The KFS will enable these borrowers to access credit at affordable rates and terms, and avoid any hidden or unfair charges.
Benefits of KFS for lenders
The KFS will promote healthy competition among lenders, who will have to disclose their charges and costs transparently and offer competitive rates to attract customers. The KFS will also improve the quality of credit assessment and risk management by lenders, who will have to ensure that their lending practices are fair and compliant with the RBI’s regulations.
According to a report by Invest India, the MSME financing market in India is expected to grow at a compound annual growth rate (CAGR) of 11% from FY 2020 to FY 2023, reaching Rs. 25.9 trillion by FY 2023. The report also stated that the MSME credit gap in India is estimated at Rs. 16.66 trillion, which offers a huge opportunity for lenders to tap into this underserved segment. The KFS will help lenders to differentiate themselves from their competitors and build trust and loyalty among their customers.
Scope and format
The KFS is not a new concept in the Indian financial system. The RBI had earlier introduced the KFS for individual borrowers from commercial banks, digital lending platforms regulated by the RBI, and microfinance loans. The RBI has now extended the KFS requirement to cover all retail and MSME loans, irrespective of the type or channel of lending.
The RBI has also issued guidelines on the format and content of the KFS, which will be standardized across all lenders. The KFS will be provided to the borrowers at least seven days before signing the loan agreement, along with a copy of the loan application form. According to the guidelines, the KFS must include:
- The details of annual percentage rate (APR), which is the total cost of credit expressed as an annualised percentage of the principal amount.
- The terms and conditions of recovery mechanism, such as mode of repayment, due dates, penal interest, collection charges, etc.
- The details of grievance redressal officer designated specifically to deal with digital lending/ FinTech related matters, such as name, contact number, email address, etc.
- Any fees, charges, etc., that are levied on the borrower during the term of the loan, such as processing fees, documentation charges, prepayment charges, etc.
The RBI’s move to introduce the KFS for retail and MSME loans is a commendable initiative that will benefit both borrowers and lenders in the long run. It will foster greater transparency and disclosure in the lending process, which will lead to better customer satisfaction, trust, and loyalty. It will also create a level playing field for all lenders, who will have to adhere to the same standards and norms while offering loans to retail and MSME customers.
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