Banks cannot slip in extra charges beyond KFS: RBI

Banks and other regulated institutions are prohibited from imposing additional fees during the loan period that are not disclosed in the Key Fact Statement (KFS) without the borrower's approval, as per a recent notification from the Reserve Bank of India (RBI). This applies to all new retail and MSME term loans sanctioned from October 1 onwards, including fresh loans for existing clients, which must strictly adhere to the guidelines outlined in the KFS.

As per the regulator, REs (regulated entities) cannot charge any fees, charges, or other expenses that are not explicitly stated in the KFS without the explicit consent of the borrower at any point during the loan term.

“Charges recovered from the borrowers by the REs on behalf of third-party service providers on actual basis, such as insurance charges, legal charges etc., shall also form part of the APR and shall be disclosed separately. In all cases wherever the RE is involved in recovering such charges, the receipts and related documents shall be provided to the borrower for each payment, within a reasonable time,” the notification states.

“REs shall put in place the necessary systems and processes to implement the above guidelines at the earliest. In any case, all new retail and MSME term loans sanctioned on or after October 1, 2024, including fresh loans to existing customers, shall comply with the above guidelines in letter and spirit without any exception,” it adds.

The notification also mentions that the KFS shall also be included as a summary box in the loan agreement. However, credit card receivables are exempted from the provisions contained under this circular.

The KFS encompasses crucial information such as the Annual Percentage Rate (APR), representing the annual credit cost to the borrower inclusive of interest rates and all related charges. This initiative stems from the RBI's directive in February's Monetary Policy, mandating REs to furnish a KFS to retail and MSME borrowers, emphasising transparency and borrower protection through clear language and comprehensive details on APR, recovery procedures, and grievance redressal mechanisms.

The KFS, designed to be easily understood, must be in a language accessible to borrowers and feature a unique proposal number, remaining valid for a minimum of three working days for longer-term loans having tenure of seven days or more and valid for one working day for shorter-term loans having tenure of less than seven days. Borrowers must acknowledge their understanding of the KFS, and it must include a detailed computation sheet showcasing the APR and the loan's amortisation schedule, encompassing all charges from the entity and third-party service providers, ensuring full disclosure to borrowers.