Last week, the Reserve Bank of India (RBI) ordered Bajaj Finance to stop issuing new loans through its 'eCOM' and 'Insta EMI Card' due to non-compliance with digital lending guidelines, particularly the non-issuance of Key Fact Statements (KFS) to the borrowers under these two lending products and the deficiencies in the Key Fact Statements issued in respect of other digital loans sanctioned by the company.
The central bank introduced the Digital Lending norms in September 2022 to curb the unscrupulous growth in instant digital personal loans and to strengthen customer protection.
One of the requirements of the framework was for lenders to issue a ‘key fact statement’ ( KFS) to borrowers before the execution of the loan in a standardised format.
Digital loans have come under scrutiny following the proliferation of unauthorised loan apps and defaults on low-value digital loans.
Here is everything you need to know about the KFS and why borrowers must read its terms and conditions.
What is KFS
The Key Fact Statement is a concise document that outlines the essential terms and conditions of a financial product, such as a loan or credit facility. It includes information about interest rates, fees, repayment terms, and other critical details.
It was introduced last year - as part of the Digital Lending Guidelines- to drive transparency in consumer lending.
"The KFS is crucial for borrowers as it provides a clear, understandable summary of the loan terms. This transparency is vital for making informed decisions and for comparing different loan offers," said Sonal Alagh, Partner, Alagh and kapoor law offices.
It outlines key features of the financial product or loan, such as the interest rate, fees (application, annual, late payment, etc.), and the total cost of the loan. It details the repayment terms, including the duration of the loan, frequency of payments (monthly, bi-monthly, etc.), and any penalties for early repayment or missed payments.
Importance of a KFS
Nihal Bhardwaj, Associate, SKV Law Offices, lays down the importance of a KFS:
(a)It promotes transparency by presenting essential information about financial products or loans in a clear, standardized format. This clarity allows borrowers to easily compare different products offered by various financial institutions.
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(b)The standardized format of KFS allows borrowers to compare similar products side by side, facilitating a more comprehensive understanding of the differences between various loan options. This comparison helps borrowers choose the product that best aligns with their financial needs and capabilities.
(c)KFS helps borrowers avoid surprises or hidden costs associated with financial products. By laying out all the essential information upfront, borrowers are less likely to encounter unexpected fees or terms that were not initially disclosed.
What borrowers should know:
Comprehension of Terms: Borrowers should thoroughly review the KFS to understand the terms of the loan, including interest rates, fees, and repayment obligations, said Alagh.
Comparison Tool: The KFS can be used as a tool to compare different loan products, allowing borrowers to choose the most suitable option.
Awareness of Changes: Borrowers should be aware that any significant changes to the loan terms during the loan period must be reflected in an updated KFS.
"Borrowers should be aware that the KFS goes beyond basic information, offering a detailed overview of the loan terms. It covers aspects such as the loan amount, APR, recovery mechanisms, details of the grievance redressal officer, and the cooling-off/look-up period... It acts as a comprehensive guide, enabling borrowers to understand the complete terms of the loan, including potential charges and the grievance redressal process. This transparency ensures that borrowers can make well-informed decisions, preventing hidden charges and contributing to a fair and transparent borrowing experience," said Kaushik Mehta, Founder & CEO of RUloans Distribution pvt ltd.
Impact of RBI move on borrowers
- The RBI's ban on Bajaj Finance's products is aimed at protecting consumer interests and ensuring fair lending practices in the digital lending space.
- New customers will not be able to avail of loans under the above-mentioned banned products until Bajaj Finance rectifies the deficiencies identified by the RBI.
- Existing loans under the eCOM and Insta EMI Card products will continue to be serviced as per the original terms and conditions. While new customers will not be able to avail loans under these products, existing customers will not be affected.
"Since the ban is limited to newly issued loans and will remain in effect for as long as Bajaj Finance fails to adhere to the prescribed guidelines, the prohibition will not affect users who have already been issued loans. However, because Bajaj Finance is a prominent player in FinServ lending, this may impact the retailers who have a large base of online consumers," said Bhardwaj.
Meanwhile, users will need to explore alternative options from the same lender or others as per their requirements.
Alagh summarises the impact on borrowers:
- Existing Loans: Borrowers with existing loans should typically continue to adhere to their repayment schedules unless informed otherwise.
- Loan Terms Modification: Existing borrowers might face changes in loan terms or repayment schedules.
- Market Reaction: The broader financial market might react, affecting interest rates, lending practices, and investor confidence
- Restricted Services: Users of Bajaj Finance might face restrictions on availing of new loans or credit facilities. A ban might affect the availability of new loans or financial products offered by Bajaj Finance.
- Seeking Alternatives: Borrowers looking for new loans might need to explore alternatives to Bajaj Finance.
RBI ban will result in a decline in loan growth
"The move taken by RBI will also see a decline in loan growth since the step has been taken to reduce excesses in the NBFC space. We have witnessed that over the past few months ticket size of loans has increased but approvals have become stricter. And now, RBI's decision will set a chain reaction, slowing down the growth in consumption of retail loans and hence impacting profitability. This will take a toll on NBFC's funding cost but in the longer run this will be beneficial for the overall health of the industry," said Manish Shara, Co-founder & CEO of fintech platform Zet.