Fair Practice Code for all NBFCs

The Reserve Bank vide its circular dated September 28, 2006, issued guidelines on the Fair Practices Code (FPC) for all NBFCs to be adopted by them while doing lending business. The same was revised with the sector including the creation of a New Category of NBFCs viz; NBFC-MFI and the rapid growth in NBFCs lending against gold jewelry. The revised circular was issued on March 26, 2012, covering general principles on adequate disclosures on the terms and conditions of a loan and also adopting a non-coercive recovery method.

Guidelines on Fair Practices Code for NBFCs:

1. All communications to the borrower about loan application and processing and all other communication with the borrower shall be in the vernacular language or a language as understood by the borrower.

2. The Boards of NBFCs are advised to lay out appropriate internal principles and procedures in determining interest rates and processing and other charges, and Loan application forms should include necessary information that affects the interest of the borrower, so that a meaningful comparison with the terms and conditions offered by other NBFCs can be made and informed decision can be taken by the borrower.

3. The loan application form may indicate the documents required to be submitted with the application form. Acknowledgment shall give the time frame within which loan applications will be disposed of. The NBFCs should convey in writing to the borrower in the vernacular language as understood by the borrower using sanction letter or otherwise, the amount of loan sanctioned along with the terms and conditions including annualised rate of interest and method of application thereof, and keep the acceptance of these terms and conditions by the borrower on its record. As complaints received against NBFCs generally pertain to charging of high interest / penal interest, NBFCs shall mention the penal interest charged for late repayment in bold in the loan agreement.

4. NBFCs are required to furnish a copy of the loan agreement as understood by the borrower along with a copy of each of all enclosures quoted in the loan agreement to all the borrowers at the time of sanction/disbursement of loans.

5.  The terms/conditions of the loan sanctioned should be conveyed to the borrower in the vernacular language understood by the borrower informing the amount of the loan sanctioned along with the terms and conditions including annualised rate of interest and method of application thereof and keep the acceptance of these terms and conditions by the borrower on its record. As complaints received against NBFCs generally pertain to charging of high interest / penal interest, NBFCs shall mention the penal interest charged for late repayment in bold in the loan agreement.

6. The NBFCs should give notice to the borrower in the vernacular language or a language as understood by the borrower of any change in the terms and conditions including disbursement schedule, interest rates, service charges, prepayment charges, etc. NBFCs should also ensure that changes in interest rates and charges are effected only prospectively. A suitable condition in this regard should be incorporated into the loan agreement.

(b) The decision to recall/accelerate payment or performance under the agreement should align with the loan agreement.

(c) NBFCs should release all securities on repayment of all dues or on realisation of the outstanding amount of loan subject to any legitimate right or lien for any other claim NBFCs may have against borrowers. If such right of set-off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which NBFCs are entitled to retain the securities till the relevant claim is settled/ paid

To know more on NBFC-MFI read: FAIR PRACTICE CODES FOR MICROFINANCE INSTITUTIONS

Source: RBI website