With the issuance of this notification, RBI has mandated the long- standing need for communicating important aspects of a loan (like charges, rate of interest, other levies, equated repayments, etc) in a transparent, simple and comparable manner for retail / MSME borrowers who have limited ability to evaluate complex financial jargon. Further by prescribing a standard format of KFS, borrowers can compare loans in a manner that is devoid of any legalese.
RBI has made accountability a priority since the KFS format mandates not only mentioning a phone number and an email id of a nodal grievance redressal officer but also requires the lender to provide a response to a complaint / grievance within 1 working day. RBI has emphasized the true essence of clean jargon free lending which would be the backbone of financial inclusion and rapid credit growth in a country like India.
While RBI had announced its regulatory intent in the Statement on Development and Regulatory Policies dated 8 February 2024, this notification implements the announcement and makes KFS mandatory for retail / MSME lending from 1 October 2024. There are various changes that a RE will be required to undertake in its processes, customer journey and importantly, calculations of APR to implement this notification. Therefore, in our view it will be a essential for the RE to test the KFS issuance processes much before the deadline. Furthermore, the RE will have to impart training to credit managers and mid office teams of credit departments to implement this RBI requirement.
Another area to evaluate for RE would be instances where if KFS has been accepted by the borrower, would it bind the RE to disburse the loan. The KFS is a summarised version of the terms of the loan. However, the grant of the loan itself may have several conditions, typically comprised in the sanction letter. According to us the binding force of the KFS during the “validity period” is only on the terms, and not on the grant of the loan itself. If the conditions precedent for availing the loan have been satisfied, the lender will be bound by the terms as contained in the KFS; however, that may not always be the case.
Overall in our view, with the issuance of this notification, RBI has taken large strides in improving retail credit lending (including digital lending) practices in India. Whilst the RE may face some initial challenges around process and system changes in implementing the notification, we expect this to be streamlined within a couple of quarters and be an inherent part of the retail lending practices.
