Borrowers will have more clarity on their loan costs with the help of key facts statement (KFS) to be issued by banks and non-banking financial companies (NBFCs) from October 1.
The Reserve Bank of India (RBI) directed banks to provide borrowers with an annualised percentage rate (total cost of loan) to enhance transparency and empower borrowers to make informed financial decisions. In simple terms, APR will comprise not just the rate of interest but also all other loan-related costs.
On April 15, the central bank issued an instruction on the key facts statement (KFS), which will be applicable in cases of all retail and MSME (micro, small and medium enterprises) term loan products offered by all regulated entities.
How will APR help?
The annualised percentage rate (APR) is the annual cost of credit to the borrower, which includes the interest rate and all other associated charges. These are then used to arrive at an annual cost and this is measured in percentage terms. The borrower does not have to look at the interest along with other individual charges and then try and understand what their actual cost will be. They can just look at the APR and get a clear idea about what they’re paying for their loan. This becomes one single figure that gives the whole picture of the loan cost.
The KFS will also have to provide a computation sheet of the APR, and the amortisation schedule of the loan over the repayment period. In cases where the lender is involved in recovering such charges, the receipts and related documents will have to be provided to the borrower for each payment. Any fees or charges which are not mentioned in the KFS cannot be charged by the regulated entity to the borrower at any stage during the term of the loan without the explicit consent of the borrower.
Overall picture
APR gives a comprehensive idea about the loan cost to the borrower. This shifts the whole balance of responsibility on the loan provider for giving the information in a single place. The borrower doesn’t have to hunt for information about other costs that can vary from bank to bank. Currently, it isn’t easy for borrowers to get a comprehensive picture to have all the details when comparing loans.
A person has to compare loans from several lenders before they make a decision. This becomes a tough task when all the details about the costs have to be gathered separately and then calculated. The presence of the APR makes the process easy. Building on this, the borrower can also add other features and details related to the loan while making the final decision.
The entire exercise will reduce the work for the borrower significantly. In case there is just the interest cost available then they have to look at each additional charge such as processing fees, administrative fees, etc., and then do the calculations on their own. Here the problem is solved because the APR gives all the details within the number that is generated.
How to locate your KFS?
Lenders are mandated to provide all borrowers with a clear, concise KFS at every stage of the loan processing as well as in the case of any change in terms and conditions. Regulated entities shall provide a KFS to all prospective borrowers to help them take an informed view before executing the loan contract, as per the standardised format given on the RBI website. Banks have to explain the contents of KFS to the borrower and obtain an acknowledgement to prove that she has understood the same.
Validity and discrepancies
Yes, the borrower will have a validity period of at least three working days for loans having a tenor of seven days or more, and a validity period of one working day for loans having a tenor of less than seven days to agree to the terms of the loan agreement as mentioned in the KFS. The regulated entity will be bound by the terms of the loan indicated in the KFS if agreed to by the borrower during the validity period.
If you do not receive the KFS or spot a discrepancy in the KFS, you can raise it with the lending company. If the grievance is not redressed to the satisfaction of the borrower, another grievance can be registered with the RBI’s Banking Ombudsman.