What is KFS Acknowledgement Requirement?

The RBI Notification on Key Fact Statements (KFS) for Loans and Advances (“new KFS Rules”) mandates that the lenders obtain an “acknowledgement” of the borrower on the KFS.

For the sake of clarity - here’s a screenshot of the exact provision:

So what changes now?

Do lenders need to collect eSign on KFS? Can lenders make do with a simple “I accept” box?

That’s what we’ll answer in this article.

Note: In this article, we’ll confine ourselves to digital KFS flows. If you are running a physical KFS flow - then the answer is obvious - simply use a wet ink signature or thumb impression.

This question is only relevant if you get your KFS executed before your loan agreement

Lenders currently follow one of two approaches when it comes to KFS:

1. KFS as a separate process - before loan agreement
2. KFS as part of the loan agreement kit

Approach 1 is compliant in both letter and spirit with the new KFS Rules - and is the most common approach being followed in the market.

Approach 2 might be compliant with the letter of the law. But there’s a decent chance that it could violate RBI’s intent with these new KFS Rules. As such, we don’t advise Approach 2. However some lenders have adopted this approach.

Why does this matter?

Because in Approach 2 - the question of acknowledgement is practically pointless.

Think about it.

Most lenders collect an Aadhaar eSign or Secure Virtual Sign in digital loan agreement flows - even prior to the new KFS Rules. The digital loan agreement kit here would be a single PDF.

Now after the new KFS Rules - the digital loan agreement kit would be updated to include the new RBI KFS Format in the same PDF document kit. So the eSign that is performed on the kit would apply to the KFS as well.

Hence the question of “What should I use for digital acknowledgement of KFS” is not relevant in cases where KFS is eSigned in the same document kit as the loan agreement.

The question is only relevant in cases where the KFS is signed separately from the loan agreement kit. 

So my KFS is separate from my loan agreement - what do I do for acknowledgement? Can I use clickwrap?

When the KFS is separate from loan agreement - you will need to collect some form of digital acknowledgement on it.

A lot of lenders employ clickwrap processes for basic acknowledgements. Clickwrap is that “I accept” box or a “Yes/No” box. We all have done a clickwrap when signing up for services online.

Can this same method be used for KFS?

Technically, yes. Practically - probably not.

Clickwrap is valid - but might not be acceptable to RBI or the Courts

Mode of any digital acknowledgement, authentication or sign needs to be looked at through two prisms:

1. Validity - whether a type of digital method used for signing/acknowledgement is legally permissible or not. This is a yes or no question
   
   
2. Enforceability/Auditability - whether the valid digital method used for signing/acknowledgement is easy to enforce or easy to pass through regulator audits. This is more like a spectrum. Some forms will be easier to enforce. Some will be harder to enforce. Even if both are legally valid.

Clickwrap is valid under law. There is no law prohibiting clickwrap from being used as a digital acknowledgement.

However, clickwrap may not be enforceable in a court of law or in an RBI audit. 

The key ingredients of enforceability are:

1. Identity: Whether the signature can be tied back to the specific signer
2. Authentication: Whether the signatures can be tied to the specific document/agreement and terms therein on which it is being affixed
3. Non-repudiation: Whether the signature will be hard to dispute by either party in a court of law or before a regulator

Clickwrap fails on all 3 counts.

Ingredient of Enforceability

Clickwrap’s performance

Identity

No way to know if borrower indeed pressed that button

Authentication

Clickwrap does not “show up” on a document. It’s a separate authentication process

Non repudiation

Easy for signer to dispute that they actually did the clickwrap for the KFS in question

Why does enforceability matter for KFS digital acknowledgement?‍

Enforceability of your digital acknowledgement matters for 2 key reasons:

1. RBI’s intent to enforce the new KFS Rules: RBI seems quite clear - it wants to strictly enforce the new KFS Rules. In order to enforce compliance - it will need to conduct audits.

In these audits, the RBI will need to see that proper digital acknowledgements are being collected on the KFS - as it is one of the key elements of compliance.

Therefore, the mode of digital acknowledgement will need to be verifiable, untamperable and auditable. In other words - it will need to be very enforceable.

2. KFS as the single source of truth for loan agreement means that it will now be the most important document in court proceedings: In the new KFS Rules, the RBI has mentioned that the lender will be bound strictly by the terms and conditions of the KFS once it has been digitally acknowledged.

In effect - the KFS now acts as a binding, single source of truth for the entire loan transaction.

As a result - it is now probably the most important document during loan recovery and enforcement proceedings.

To successfully prove the KFS in such proceedings - lenders will need to show clear, undisputed digital acknowledgement.

In other words - the mod of digital acknowledgement will need to be very enforceable.

So what method should I use for KFS digital acknowledgement?

The method you choose will ultimately depend on the risk appetite of your legal and compliance teams.

There are many options you can choose:

• Aadhaar eSign
• Secure virtual signatures
• Plain virtual signature impressions
• Physical Signature uploads
• Secure and auditable digital acknowledgements

Each method has different “enforceability”. 

For loans where enforcement is a priority - your legal and compliance teams are likely to opt for Aadhaar eSign, Secure virtual signatures or physical sign uploads which are easier to enforce in court. They are all forms of digital acknowledgement that involve a very specific and traceable authentication process (OTP, Face capture etc.)

Something like Aadhaar eSign also has additional presumptions of validity under the Evidence Act (both old and new).

For loans where enforcement is not a priority - For such loans, your only priority may be to pass RBI audits. Therefore your legal and compliance teams may opt for simple virtual signatures or secure digital acknowledgments.

They don’t have intricate authentication as the previous methods we mentioned. But they do tie back to the specific KFS, are untamperable and show a clear audit trail. 

These are lower cost, simpler electronic methods which can easily be audited by the RBI - while maybe being a bit harder to enforce in court.

‍Here’s a helpful diagram - the spectrum of enforceability - to help you choose:

You can also check out our blog on legal enforcement of eSign for a deeper understanding.

‍Can Leegality help me with digital acknowledgement of KFS?

Yes absolutely. You can use Leegality’s BharatSign options to choose from over 15 types of eSign and eAcknowledgement for your KFS.

From Aadhaar eSign to a simple quick virtual impression - you get every possible choice all under one roof.

Apart from the acknowledgement requirement - there are several other requirements under the new KFS Rules. You can see our KFS compliance guide to help you learn more.

Leegality can help you comply with all requirements by the October 1 deadline.

How do I get in touch with Leegality?

We can set up a 45 minute KFS demo for you - just visit our KFS Home Page.

On the KFS Home Page you’ll also find an interactive 2 minute click-through demo

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