The Fair Practices Code document codifies the procedures to ensure clarity, transparency, Timelines, and responsiveness in the financial institution’s relationship with the borrower customers at all stages like marketing, processing, sanctioning, monitoring, and administration.
The guidelines on the Fair Practices Code issued to various Regulated Entities (REs) since 2003, inter-alia, advocate fairness and transparency in charging of interest by the lenders while providing adequate freedom to REs as regards their loan pricing policy. During the onsite examination of Regulated Entities (Banks, NBFCs, and FIs) for the period ended March 31, 2023; RBI came across instances of lenders resorting to certain unfair practices in charging interest. Therefore, in the interest of fairness and transparency, all REs are directed to review their practices regarding the mode of disbursal of loans, application of interest, and other charges and take corrective action, including system-level changes, as may be necessary.
The Fair Practices Code based on the guidelines given below was mandatory to be put in place by all NBFCs and microfinance institutions with the approval of their Boards.
1. A fair practices code (FPC) based on these directions shall be put in place by all REs with the approval of their boards.
2. The RE shall display the FPC in all its offices and website. The FPC should be issued in a language understood by the borrower.
3. The standard form of loan agreement shall be in a language understood by the borrower.
4. Microfinance institutions shall provide a loan card to the borrower which shall incorporate the following:
Information which adequately identifies the borrower;
Simplified factsheet on pricing;
All other terms and conditions attached to the loan;
Acknowledgements by the RE of all repayments including installments received and the final discharge; and
Details of the grievance redressal system, including the name and contact number of the nodal officer of the RE.
5. As mentioned above all entries in the loan card should be in a language understood by the borrower.
6. Issuance of non-credit products shall be with the full consent of the borrowers and the fee structure for such products shall be explicitly communicated to the borrower in the loan card itself.
7. Microfinance institutions shall have a board-approved policy regarding the conduct of employees and a system for their recruitment, training, and monitoring. This policy shall, inter alia, lay down minimum qualifications for the staff and shall provide necessary training tools to deal with the customers. Training for employees shall include programs to inculcate appropriate behavior toward customers. The conduct of employees towards customers shall also be incorporated appropriately in their compensation matrix.
8. Field staff shall be trained and equipped to make necessary enquiries regarding the income and existing debt of the household.
9. Training, if any, offered to the borrowers shall be free of cost.
10. The outsourcing of any activities of RE does not reduce the responsibilities, obligations and onus compliance solely rest with the RE.
11. A declaration that the RE shall be accountable for inappropriate behaviour by its employees or employees of the outsourced agency and shall provide timely grievance redressal, shall be made in the loan agreement and also in the FPC displayed in its office/ branch premises/ website.
12. Regulated entities (RE) shall put in place a mechanism for identification of the borrowers facing repayment-related difficulties, engagement with such borrowers, and providing them with necessary guidance about the recourse available.
13. Recovery shall be made at a designated/ central designated place decided mutually by the borrower and the RE. However, field staff shall be allowed to make recovery at the place of residence or work of the borrower if the borrower fails to appear at the designated/ central designated place on two or more successive occasions.
14. RE or its agent shall not engage in any harsh methods towards recovery. Without limiting the general application of the foregoing, the following practices shall be deemed as harsh:
15. Use of threatening or abusive language, Persistently calling the borrower and/ or calling the borrower before 9:00 a.m. and after 6:00 p.m., harassing relatives, friends, or co-workers of the borrower, Publishing the name of borrowers, using or threatening to use of violence or other similar means to harm the borrower or borrower’s family/ assets/ reputation, misleading the borrower about the extent of the debt or the consequences of non-repayment are treated as unfair practices.
16. RE shall have a dedicated mechanism for the redressal of recovery-related grievances. The details of this mechanism shall be provided to the borrower at the time of loan disbursal.
17. Recovery agents engaged shall have a due diligence process in place for engagement of recovery agents, which shall, inter alia, cover individuals involved in the recovery process. REs shall ensure that the recovery agents engaged by them carry out verification of the antecedents of their employees, which shall include police verification. REs shall also decide the periodicity at which re-verification of antecedents shall be resorted to.
18. To ensure due notice and appropriate authorization, the RE shall provide the details of recovery agents to the borrower while initiating the process of recovery. The agent shall also carry a copy of the notice and the authorization letter from the RE along with the identity card issued to him by the RE or the agency. Further, where the recovery agency is changed by the RE during the recovery process, in addition to the RE notifying the borrower of the change, the new agent shall carry the notice and the authorization letter along with his identity card. The notice and the authorization letter shall, among other details, also include the contact details of the recovery agency and the RE. The up-to-date details of the recovery agencies engaged by the RE shall also be hosted on the RE’s website.
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