In a significant development for the MSME lenders, the Reserve Bank of India (RBI) on Thursday announced to mandate all Regulated Entities (REs) to provide the ‘Key Fact Statement’ (KFS) to the borrowers for all retail and MSME loans.
With this move, the REs will have to offer loans at a rate that includes the entire cost of the loan, not just the interest rate itself but also other costs such as processing fees, documentation charges etc.
The move shall greatly benefit the borrowers in making an informed decision, Governor Shaktikanta Das said while announcing the Monetary Policy Committee (MPC) announcement.
Notably, the six-member MPC also decided by 5 is to 1 majority to keep the policy rate unchanged at 6.5%, and maintain ‘withdrawal of accommodation’ stance.
Speaking on the RBI’s move, Shachindra Nath, member of FIDC and founder of U Gro Capital said RBI have been focusing on Fair Practice Code for quite some time and through digital lending guidelines KFS was implemented. This is in continuation of the same.
“The move would bring transparency in market where small MSME borrowers would now clearly understand their cost of borrowing. The practices of charging excessing processing fees, advance EMI, DSRA and other method of charging interest which customer is unable to understand would get curbed,” he added.
George Alexander Muthoot, MD, Muthoot Finance, said, “As an NBFC adhering to compliance, corporate governance and taking proactive measures to safeguard the interest of our customers is of prime importance to us, and we welcome this move as it will encourage and enable the borrowers to take informed decisions.”
What is the Key Fact Statement (KFS)?
Key Fact Statement is the requirement for lenders to provide their borrowers key information regarding a loan agreement.
It contains information related to all-in-cost of the loan, in simple and easy to understand format.
Currently, KFS is specifically mandated in respect of loans by scheduled commercial banks to individual borrowers; digital lending by REs; and microfinance loans.
Now, it will be mandated for all the REs to provide the ‘Key Fact Statement’ (KFS) to the borrowers for all retail and MSME loans.
“Providing critical information about the terms of the loan agreement, including all-inclusive interest cost, shall greatly benefit the borrowers in making an informed decision,” Governor Das said in his speech.
How will it benefit the borrower?
As mentioned, the Key Fact Statement will include information pertaining not just to the interest rate, but also other costs such as processing fees, documentation charges among others.
A significant benefit this move will have is that in case of penalties, the customers should know how much it will come to.
REs will be liable to provide all this information in a standard prescribed format.
Raja Debnath, Managing Director, Veefin Solutions Ltd explained that initially the lack of transparency often led to financial stress and hindered informed decision-making for MSMEs.
Citing an example, he said, oftentimes MSMEs have been unaware of charges like foreclosure fees, which can be substantial and significantly impact their bottom line.
With KFS, such hidden costs will be brought to light, enabling businesses to make informed decisions and plan their finances accordingly. By requiring lenders to disclose all charges upfront in a standardized format, MSMEs may finally understand the full, all-inclusive cost of their loans. This also empowers them to compare offers effectively, negotiate better, and prevent unfavorable circumstances in the future, he said.
HP Singh, CMD, Satin Creditcare Network Ltd said the accessibility of key fact statements will enable borrowers to fully understand the terms and conditions of their loans and make effective comparisons between different loan products.
“This is a win-win situation for both the lenders and borrowers. While this will enable borrowers to be more prudent while taking loans, it will enable lenders to perform due diligence of customers more effectively and understand their needs better,” he said.
Prashant Muddu, Managing Director & CEO, Jocata said the move will bring clarity among borrowers about the terms of loan agreement including the complete cost of the loan such as loan rate of interest and other associated costs such as the processing fees, legal charges etc.
“Going forward, the industry will see further tightening of the regulatory environment and more policy push for banks, NBFCs, and FinTechs towards priority sector lending,” he added.
