NBFC Fair Practice Code: RBI Scale Based Regulations

FAIR PRACTICE CODE FOR NBFC AS PER THE NBFC – SCALE BASED REGULATIONS

Fair practice code is a code prescribed by the Reserve Bank of India initially in the year 2006 by the way of a “Guidelines on Fair Practices Code for Non-Banking Financial Companies”. This was brought forth for the purpose of ensuring the method of fair practices being adopted by the lenders in the markets in the event of lending to the borrowers. The said regulation also prescribed the publishing of such fair practice code on the websites of the companies, if any for proper disclosure to the customers.

Further with the growing demand and size of NBFCs and the business of providing seamless and digitalized loans by the companies after the digital boom of the country, more and more companies are entering into the business of providing lending to the borrowers at a competitive rate and such NBFCs are being tightly regulated by the RBI through its regulations and circulars as updated from time to time.

Currently the Non-Banking Financial Institutions are being governed as per the “Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023” (hereinafter referred to as “NBFC – Scale Based Regulations”) which has repealed all other earlier provisions, regulations, circulars, notifications etc. and amended the regulatory structure of NBFCs into the following fours classes generally in terms of the asset size mainly:

• Base Layer
• Middle Layer
• Upper Layer
• Top Layer

Further the NBFC – Scale Based Regulations prescribes that every NBFC having a customer interface shall adopt the guidelines prescribed as the Fair Practice Code for the NBFC. The fair practice code is to be disseminated by all the NBFCs in their website and such disclosure is mandatory for the better governance and full disclosure of the processes and policies in place relating to the sanctioning of the loans by the NBFCs to the Borrower.

NEED FOR FAIR PRACTICE CODE

• To ensure Fair Practices while dealing with the customers and promote good, fair, and trustworthy practices by setting up minimum standards.

• To ensure greater transparency enabling customers in having a better understanding of the product and taking informed decisions.

• To ensure that clients are advised of the terms and conditions of products/ services provided in a comprehensive manner for their consideration prior to commitment of a transaction.

• To monitor and administer client accounts in a fair and transparent manner consistent with the terms and conditions of the facility provided.

• To strengthen mechanisms for redressal of customer grievances.

The NBFCs shall ensure that the following are mandatorily included in their Fair Practice code in letter and in spirit:

APPLICATION OF LOANS

• The application of loan shall be in a vernacular language, or any other language so understood by the borrower while disbursing of the sanction letter along with the enclosures thereof.
• Loan application forms shall include necessary information which 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.
• The loan application form shall indicate the documents required to be submitted with the application form.
• NBFCs may provide a time frame for disposal of such loans from the point when the loan process starts till the disbursement of funds in the account of such borrower along with mandatorily providing the borrower with such acknowledgement as necessary.

LOAN APPRAISAL TERMS AND CONDITIONS

• The amount of loan along with the rate of interest so charged and the tenure shall be mandatorily specified in the sanction letter, or any other document so issued by the NBFC alongwith the loan agreement issued at the time of agreement.
• Due to most of the complaints being of excessive interest charged, the borrower shall be informed of the penalties charged for the late repayment of loan upfront at the tie of entering into the agreement.
• The NBFCs shall ensure that all the enclosures as mentioned in the Loan Agreement shall be provided to the borrowers along with such loan agreement and all the terms and conditions are provided in a simple and clear manner so that there shall be no ambiguity in such terms and conditions which gives rise to disputes in future.

PENAL CHARGES IN LOAN ACCOUNTS

• NBFCs shall formulate a Board approved policy on penal charges or similar charges on loans, by whatever name called.
• NBFCs shall ensure that the penal charges so levied by them are defined clearly in the loan agreement and such charges shall not be excessive or unreasonable towards the borrowers.
• The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be higher than the penal charges to non-individual borrowers for similar non-compliance of material terms and conditions.

DISBURSEMENT OF LOANS INCLUDING CHANGES IN TERMS AND CONDITIONS 

• In case of any change in the terms and conditions including disbursement schedule, interest rates, service charges, prepayment charges etc, the NBFCs shall send a notice to the borrower of the same in a timely and proper manner.
• Any change in the interest rate and the charges are to be affected prospectively and not retrospectively and such a condition shall be incorporated in the loan agreement.
• The NBFCs shall not recall/accelerate payment or performance unless the same has been provided in the loan agreement and communicated to the borrower at time of loan agreement.

RELEASE OF MOVABLE/IMMOVABLE PROPERTY DOCUMENTS ON REPAYMENT/ SETTLEMENT OF PERSONAL LOANS

• The Company shall adopt best practices in release of movable/ immovable property documents upon receiving full repayment and closure of loan account to avoid customer grievances and disputes in future.
• NBFCs shall ensure that the release all the original movable / immovable property documents and remove charges registered with any registry within a period of 30 days after full repayment/settlement of the loan account.
• The NBFC shall be provided with the option to the borrowers for collecting such documents on full repayment ither from the banking outlet/branch where the loan account was serviced or any other office of the NBFC where the documents are available, as per her/his preference which shall be provided to him in the loan agreement along with the timeline of such loans.
• The NBFCs shall on delay of more than 30 days in release of movable/immovable property for after full repayment/ settlement of loan, communicate to the borrower the reason for delay along with amount of Rs. 5000 for each day of delay.

EQUATED MONTHLY INSTALMENTS (EMI) BASED PERSONAL LOANS ON THE FLOATING INTEREST RATE 

• While the sanction of EMI based floating rate personal loans, the repayment capacity of borrower shall be ascertained.
• NBFCs shall clearly communicate at the time of sanction of loan to the borrower possible impact of change in benchmark interest rate on the loan leading to changes in EMI and/or tenor or both.
• NBFCs shall provide the option to the borrowers to switch over to a fixed rate and the number of times such switch over will be allowed in accordance with their Board approved policy.
• The borrowers shall also be given the choice to opt for (a) enhancement in EMI or elongation of tenor or for a combination of both options; and, (b) to prepay, either in part or in full, at any point during the tenor of the loan.
• The sanction letter issued to the borrower shall disclose clearly all those charges for switching of loan from Floating to fixed interest and any other charges associated with the same.
• NBFCs shall share/ make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which shall at the minimum, enumerate the principal and interest recovered till date, EMI amount, number of EMIs left and annualized rate of interest/Annual Percentage Rate (APR) for the entire tenor of the loan.

GENERAL CONDITIONS

• NBFCs shall refrain from interference in the affairs of the borrower except for the purposes provided in the terms and conditions of the loan agreement (unless information, not earlier disclosed by the borrower, has been noticed).
• NBFCs shall ensure that no undue harassment with the borrower such as persistently bothering the borrowers at odd hours, use muscle power for recovery of loans etc. are carried out and the staff of such NBFCs are adequately trained for such conditions.
• In case of receipt of request from the borrower for transfer of borrower’s account, the consent or otherwise i.e., objection of the NBFC, if any, shall be conveyed within 21 days from the date of receipt of request.

GRIEVANCE REDRESSAL MECHANISM 

• The NBFCs shall ensure to take up the grievance promptly and try to resolve the matter expeditiously. If the matter is not resolved within the prescribed time period or is not capable of being resolved, then the customer shall be informed appropriately at the earliest opportunity.
• The Board of Directors shall also provide for periodical review of the compliance of the Fair Practices Code and the functioning of the grievance’s redressal mechanism at various levels of management. A consolidated report of such reviews shall be submitted to the Board at regular intervals, as may be prescribed by it.
• An officer shall be appointed along with their contact details who shall act as the Principal Nodal officer and Grievance Redressal Officer of the Company and assist the borrowers in resolving their grievances in a speedy and timely manner.

VEHICLE OR GOLD FINANCING

• The NBFCs for providing financing of vehicles shall ensure that it includes a repossession clause which shall be intimated to borrower in the terms and conditions along with loan documents regarding:
  1. Notice period before taking possession
  2. Circumstances under which notice period will be waived.

• Procedure for taking possession of security

1. A provision regarding final chance to be given to the borrower for repayment of loan before the sale/auction of the property
2. The procedure for giving repossession of the vehicle o Procedure for sale/auction of the property.

• NBFCs providing lending to individuals against collateral of gold jewellery, shall ensure that:
  1. KYC guidelines as stipulated by RBI is followed along with Proper assessment procedure for the jewellery received.
  2. That the Internal systems to satisfy ownership of the gold jewellery are adequate and the staff of NBFCs are provided training periodically and inspected as such by the internal auditors.

• The jewellery accepted as collateral shall be appropriately insured.

1. The auction shall be auctioned only through auctioneers approved by the Board and announced to the public by issue of advertisements in at least two newspapers, one in vernacular and another in national daily newspaper.
2. The policy shall also cover systems and procedures to be put in place for dealing with fraud including separation of duties of mobilisation, execution and approval.
3. NBFCs shall not issue misleading advertisements like claiming the availability of loans in a matter of 2-3 minutes.

• NBFCs financing against the collateral of gold must insist on a copy of the PAN Card of the borrower for all transaction above ₹5 lakh.

MISCELLANEOUS

• NBFCs shall not discriminate in extending products and facilities including loan facilities to physically/visually challenged applicants on grounds of disability. All branches of NBFCs shall render all possible assistance to such persons for availing of the various business facilities.
• The NBFCs shall ensure that relevant factors are looked upon for arriving at the rate of interest to be charged for loans and advances and the same shall be disclosed to the borrower in the application form and communicated explicitly in the sanction letter.
• The NBFCs shall ensure that the rates of interest so charged are not excessive or such that are not in the best interest of borrower.
• The NBFCS shall charge such interest on the loans to the borrower only from the date of actual disbursement of the funds to the borrower. 

CONCLUSION

The Fair practice code as provided in the NBFC – Scale Based Regulation shall not be applied by the NBFC in such a way that there are as provided in these regulations, but the Fair practice code shall be adopted by the company in letter and in spirit in such a way that the terms and conditions so provided under these are followed to the core by the NBFCs and the borrower shall be aware of all the charges or the terms and conditions as applicable on its loan. The main aim of such disclosure is to ensure that the customer at the end of the day is aware of the facility so provided to him and in no way is kept in abeyance of any such information.

*****

The views expressed in this article are those of the author and do not necessarily reflect the opinions of the organization or its affiliates. This content is intended for informational purposes only and should not be considered as professional advice. Readers are encouraged to conduct their own research and consult with relevant experts. 

P.S. The content of this article may be subject to omission or updates albeit not deliberately; any feedback is welcome to ensure accuracy and comprehensiveness.