What changed
RBI has harmonised existing KFS and APR disclosure instructions across all regulated entities for retail and MSME term loans. The KFS must now include a computation sheet of APR and an amortisation schedule, with charges recovered on behalf of third parties also forming part of APR. A unique proposal number and a validity period of at least three working days (or one working day for loans under seven days) are required.
What it means for you
Banks and lenders must update their loan origination systems to generate standardised KFS documents with APR calculations and repayment schedules. The three-day validity period gives borrowers time to compare offers, potentially increasing competition among lenders. Lenders must ensure KFS is explained to borrowers and acknowledgement obtained, adding a compliance step to the loan process.
What you must do
- Update loan origination systems to generate KFS in the standardised format as per Annex A, including APR computation and amortisation schedule.
- Ensure KFS includes a unique proposal number and is valid for at least three working days for loans of seven days or more, and one working day for shorter tenors.
- Train frontline staff to explain KFS contents to borrowers and obtain acknowledgement of understanding.
- Review all third-party charges recovered on behalf of service providers to include them in APR and provide receipts to borrowers.
- Align existing retail and MSME term loan products with the harmonised KFS requirements by the effective date.
Who it affects
All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks, excluding Payments Banks), All Primary (Urban) Co-operative Banks, State Co-operative Banks, and Central Co-operative Banks, All Non-Banking Financial Companies including Housing Finance Companies, Borrowers of retail and MSME term loans
What is the validity period of the KFS?
For loans with a tenor of seven days or more, the KFS is valid for at least three working days. For loans with a tenor of less than seven days, the validity is one working day. The lender is bound by the terms in the KFS if the borrower agrees within this period.
Does the APR include third-party charges like insurance or legal fees?
Yes, charges recovered by the lender on behalf of third-party service providers on an actual basis must be included in the APR and disclosed separately. The lender must also provide receipts or related documents for each such payment to the borrower.
Which loan products are covered under this circular?
The harmonised instructions apply to all retail and MSME term loan products extended by all regulated entities, including commercial banks, cooperative banks, and NBFCs. Payments banks are excluded from the scope.