KFS enables borrowers to understand key information regarding a loan agreement, including the all-in-cost of the loan, in a simple and easy-to-understand format. So far, it was applicable for loans by scheduled commercial banks to individual borrowers, digital lending by REs and microfinance loans, said RBI.
Stakeholders in the MSME ecosystem have welcomed the move by the Reserve Bank of India (RBI) on Thursday mandating all lenders to provide the ‘Key Fact Statement’ (KFS) to their retail and MSME loan borrowers to enhance transparency in lending and helping borrowers in making informed decisions.
Announcing a set of developmental and regulatory policy measures relating to financial markets, regulations, payment systems and fintech, RBI Governor Shaktikanta Das said that the requirement of KFS — so far mandated for certain categories of lenders to provide the borrower with essential information such as the all-inclusive annual percentage rate (APR) and recovery and grievance redress mechanism — is now being extended to cover all retail and MSME loans.
Welcoming the move for MSME and retail loans, Ajit Velonie, Senior Director, CRISIL Ratings Ltd. said, “The mandate will be specifically relevant for shorter-tenure loans which have relatively higher upfront processing fees but competitive interest rates.”
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KFS has been among the measures in the past by the RBI to foster greater transparency and disclosure by the regulated entities (REs) or lenders in the pricing of loans and other charges levied on the customers.
KFS enables borrowers to understand key information regarding a loan agreement, including the all-in-cost of the loan, in a simple and easy-to-understand format. So far, it was applicable for loans by scheduled commercial banks to individual borrowers, digital lending by REs and microfinance loans, said RBI separately in a statement.
“At the moment, loans and advances have components of fees and charges such as processing fees, documentation charges, etc. besides the rate of interest. The KFS will provide essential information such as all-inclusive annual percentage rate (APR) and recovery and grievance redress mechanism to the borrowers, enabling them to get a complete picture and bring much confidence and awareness to borrowers like MSMEs,” said Rajesh Sharma,Managing Director at Capri Global Capital Limited.
Taking out a loan entails the payment of additional fees and charges beyond the standard interest rate, which adds to the overall financial burden for the borrower. These extra costs, such as processing fees, upfront charges, penal interest, and other expenses, are typically not prominently featured in the loan terms and conditions.
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“In the case of MSME customers, a commission is also charged for the non-fund facilities availed by them like guarantees or letters of credit, which are required by them as an integral part of their business operations. All-inclusive cost to the customer is thus much more than the mere interest rate and is sometimes not clearly revealed to the customers,” said Jyoti Prasad Gadia, Managing Director, Resurgent India.
“With the inclusion of these changes, the real interest rate charged is thus higher than the basic interest rate charged to them and RBI is insisting that such an annual rate arrived at by including the actual changes leviable should be calculated and revealed to the retail and MSME customers in the terms and conditions of the sanction of each case,” added Gadia welcoming the step by RBI to facilitate a more robust lending mechanism.
As of December 2023, the gross bank credit deployed to MSMEs under the priority sector lending was Rs 23.87 lakh crore, growing by 19.1 per cent from Rs 20.03 lakh crore as of December 2022, as per RBI data on monthly deployment.
The priority lending as of December 2023 inMSMEswas 14.9 per cent of Rs 159.18 lakh crore inIndia’s total non-food credit during the month in comparison to 15.1 per cent during December 2022.
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