On November 15, the Reserve Bank of India (RBI) asked Bajaj Finance to stop the sanction and disbursal of loans under its two lending products with immediate effect. These products are ‘eCOM’ and ‘Insta EMI Card.’
The central bank has taken action against Bajaj Finance for non-adherence to the extant provisions of the former’s digital lending guidelines, particularly non-issuance of key fact statements (KFS) to the borrowers under these two products and the deficiencies in the KFS issued, with respect to other digital loans.
Let’s look at the nitty-gritty of the KFS and the benefits to borrowers of reviewing KFS.
What is KFS?
KFS ensures transparency and helps informed decision-making, and hence has been mandated by regulatory bodies. It’s a simple, easy-to-understand summary, covering all key terms of the loan, and the fees and charges related to the loan.
It is critical as the KFS cuts through legal terminology in a simple language and provides the borrower all key facts in a summary.
“KFS is like a skeleton of the loan and a borrower needs to know all the key joints, bending and movements,” says Rajiv Sharma, Partner, Singhania & Co.
“This statement is even more important in case of digital (fintech) loans where multiple parties may be involved in the loan process -- the customer may be dealing with an online app (which could be the loan service provider) with a totally different brand name, and the loan may have been disbursed by a partner bank/non-banking finance company (NBFC),” says Parijat Garg, a digital lending consultant. KFS provides a consistent view to the customer, irrespective of the number of parties involved in the same loan.
Key terms borrowers need to check
The KFS highlights the interest rate charged on the loan amount, impacting the total repayment amount. It also outlines various fees associated with the loan, such as processing fees, application charges, or prepayment penalties.
“It provides the Equated Monthly Instalment (EMI) value, allowing borrowers to assess affordability,” says Adhil Shetty, CEO, BankBazaar.com. The statement specifies the duration for repaying the loan, affecting monthly payments and overall interest paid.
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KFS further details the repayment schedule, including the frequency of payments and any specific clauses regarding pre-payments. “Keep an eye on any other costs or charges associated with the loan, such as insurance fees or late payment penalties,” Shetty adds.
“One should place special focus on annualised interest rate (known as APR - annual percent rate), as it combines the effective cost of loan for the customer, taking into account the interest charges and other applicable fees,” says Garg.
Also, know the conditions around default and collateral or security for the loan.
Where 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.
KFS is to be provided by banks/NBFCs before the borrower executes the loan agreement. This allows you to review the key terms before getting into a contract with the lender.
“Banks/NBFCs are supposed to share a copy of KFS, along with other key loan documents, to the borrower on email or SMS etc.,” says Garg.
“In case of digital lending, a prospective borrower can find KFS under the loan details screen which can be easily read and downloaded,” says Sharma.
“For existing customers, KFS might be accessible through their online banking accounts, under sections related to loan details or documents,” adds Shetty.
Benefits to borrowers
KFS provides a standardised document with a prescribed approach to calculate APR. So, the KFS makes it easier for the borrower to compare offers from different lenders, irrespective of the loan tenure and types of charges involved.
If you do not receive the KFS or spot a discrepancy in the KFS, you can raise it with the lending company. “The first opportunity of grievance redressal is the lender’s ombudsman, who must settle such grievance within 30 days of receipt of the complaint,” says Sharma. If the grievance is not redressed to the satisfaction of the borrower, another grievance can be registered with the RBI’s Banking Ombudsman.
“The borrower has been provided a cooling-off period for digital loans during which the borrower can cancel the loan without incurring any penalties (just the applicable APR plus principal will have to be returned to the lender),” says Garg.
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