Ozg NBFC Consultant
Ozg Center | Delhi | Mumbai | Chennai | Bangalore | Kolkata
Back Office Phone # 09811415831-37-61-72-84-92-94
W: nbfc.in | Email: ask@nbfc.in
RBI/2013-14/42
DNBS (PD) CC No.340/03.10.042/2013-14
DNBS (PD) CC No.340/03.10.042/2013-14
July 1, 2013
To
All Non-Banking Financial Companies (NBFCs)
and Residuary Non-Banking Companies (RNBCs)
and Residuary Non-Banking Companies (RNBCs)
Dear Sirs,
Master Circular - Fair Practices Code
In order to have all current instructions on the subject
in one place, the Reserve Bank of India has consolidated all the
instructions issued on the topic as at end of June 30, 2013. The Master Circular has also been placed on the RBI web-site (http://www.rbi.org.in).
Yours faithfully,
(N. S. Vishwanathan)
Principal Chief General Manager
Principal Chief General Manager
1. Introduction
The Reserve Bank vide its circular dated September 28,
2006, issued guidelines on Fair Practices Code (FPC) for all NBFCs to be
adopted by them while doing lending business. The guidelines inter
alia, covered general principles on adequate disclosures on the terms
and conditions of a loan and also adopting a non-coercive recovery
method. 1The
same was revised in view of the recent developments with sector
including creation of New Category of NBFCs viz; NBFC-MFI and also the
rapid growth in NBFCs lending against gold jewellery. Revised circular
was issued on March 26, 2012.
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All communications to the borrower shall be in the vernacular language or a language as understood by the borrower.
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Loan application forms should 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 may indicate the documents required to be
submitted with the application form.
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The NBFCs should devise a system of giving
acknowledgement for receipt of all loan applications. Preferably, the
time frame within which loan applications will be disposed of should
also be indicated in the acknowledgement.
The NBFCs should convey in writing to the borrower in the
vernacular language as understood by the borrower by means of 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.
It is understood that in a few cases, borrowers at the
time of sanction of loans are not fully aware of the terms and
conditions of the loans including rate of interest, either because the
NBFC does not provide details of the same or the borrower has no time
to look into detailed agreement.
Not furnishing a copy of the loan agreement or enclosures
quoted in the loan agreement is an unfair practice and this could lead
to disputes between the NBFC and the borrower with regard to the terms
and conditions on which the loan is granted.
NBFCs are, therefore, advised to furnish a copy of the
loan agreement preferably in the vernacular language as understood by
the borrower along with a copy each of all enclosures quoted in the
loan agreement to all the borrowers at the time of sanction / disbursement of loans.
(a) 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 in the loan agreement.
(b) Decision to recall / accelerate payment or performance
under the agreement should be in consonance 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 borrower. 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.
(a) NBFCs should refrain from interference in the affairs
of the borrower except for the purposes provided in the terms and
conditions of the loan agreement (unless new information, not earlier
disclosed by the borrower, has come to the notice of the lender).
(b) In case of receipt of request from the borrower for
transfer of borrowal account, the consent or otherwise i.e. objection
of the NBFC, if any, should be conveyed within 21 days from the date of
receipt of request. Such transfer shall be as per transparent
contractual terms in consonance with law.
(c) In the matter of recovery of loans, the NBFCs should
not resort to undue harassment viz. persistently bothering the
borrowers at odd hours, use of muscle power for recovery of loans etc.
As complaints from customers also include rude behavior from the staff
of the companies. NBFCs shall ensure that the staff are adequately
trained to deal with the customers in an appropriate manner.
(v) The Board of Directors of NBFCs
should also lay down the appropriate grievance redressal mechanism
within the organization to resolve disputes arising in this regard.
Such a mechanism should ensure that all disputes arising out of the
decisions of lending institutions' functionaries are heard and disposed
of at least at the next higher level. The Board of Directors should
also provide for periodical review of the compliance of the Fair
Practices Code and the functioning of the grievances redressal
mechanism at various levels of management. A consolidated report of
such reviews may be submitted to the Board at regular intervals, as may
be prescribed by it.
(vi) At
the operational level, all NBFCs have to display the following
information prominently, for the benefit of their customers, at their
branches / places where business is transacted:
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the name and contact details (Telephone / Mobile nos.
as also email address) of the Grievance Redressal Officer who can be
approached by the public for resolution of complaints against the
Company.
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If the complaint / dispute is not redressed within a
period of one month, the customer may appeal to the Officer-in-Charge
of the Regional Office of DNBS of RBI (complete contact details), under
whose jurisdiction the registered office of the NBFC falls.
In short, the public notice should serve the purpose of
highlighting to the customers, the grievance redressal mechanism
followed by the company, together with details of the grievance
redressal officer and of the Regional Office of the RBI.
(vii) Fair
Practices Code (which should preferably in the vernacular language or a
language as understood by the borrower) based on the guidelines
outlined hereinabove should be put in place by all NBFCs with the
approval of their Boards within one month from the date of issue of this
circular. NBFCs will have the freedom of drafting the Fair Practices
Code, enhancing the scope of the guidelines but in no way sacrificing
the spirit underlying the above guidelines. The same should be put up
on their web-site, if any, for the information of various stakeholders.
(a) The Board of each NBFC shall adopt an interest rate
model taking into account relevant factors such as, cost of funds,
margin and risk premium, etc and determine the rate of interest to be
charged for loans and advances. The rate of interest and the approach
for gradations of risk and rationale for charging different rate of
interest to different categories of borrowers shall be disclosed to the
borrower or customer in the application form and communicated
explicitly in the sanction letter.
(b) The rates of interest and the approach for gradation
of risks shall also be made available on the web-site of the companies
or published in the relevant newspapers. The information published in
the website or otherwise published should be updated whenever there is a
change in the rates of interest.
(c) The rate of interest should be annualised rates so
that the borrower is aware of the exact rates that would be charged to
the account.
The Reserve Bank has been receiving several complaints
regarding levying of excessive interest and charges on certain loans
and advances by NBFCs. Though interest rates are not regulated by the
Bank, rates of interest beyond a certain level may be seen to be
excessive and can neither be sustainable nor be conforming to normal
financial practice.
Boards of NBFCs are, therefore, advised to lay out
appropriate internal principles and procedures in determining interest
rates and processing and other charges.
In this regard the guidelines indicated in the Fair
Practices Code about transparency in respect of terms and conditions of
the loans are to be kept in view.
NBFCs must have a built in re-possession clause in the
contract/loan agreement with the borrower which must be legally
enforceable. To ensure transparency, the terms and conditions of the
contract/loan agreement should also contain provisions regarding: (a)
notice period before taking possession; (b) circumstances under which
the notice period can be waived; (c) the procedure for taking
possession of the security; (d) a provision regarding final chance to
be given to the borrower for repayment of loan before the sale / auction
of the property; (e) the procedure for giving repossession to the
borrower and (f) the procedure for sale / auction of the property. A
copy of such terms and conditions must be made available to the
borrowers in terms of circular wherein it was stated that NBFCs may
invariably furnish a copy of the loan agreement along with a copy each
of all enclosures quoted in the loan agreement to all the borrowers at
the time of sanction / disbursement of loans, which may form a key
component of such contracts/loan agreements.
In addition to the general principles as above, NBFC-MFIs
shall adopt the following fair practices that are specific to their
lending business and regulatory framework.
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The FPC in vernacular language shall be displayed by an NBFC-MFI in its office and branch premises,
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A statement shall be made in vernacular language and
displayed by NBFC-MFIs in their premises and in loan cards articulating
their commitment to transparency and fair lending practices,
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Field staff shall be trained to make necessary enquiries with regard to existing debt of the borrowers,
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Training if any, offered to the borrowers shall be free
of cost. Field staff shall be trained to offer such training and also
make the borrowers fully aware of the procedure and systems related to
loan / other products,
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The effective rate of interest charged and the
grievance redressal system set up by the NBFC-MFI should be prominently
displayed in all its offices and in the literature issued by it (in
vernacular language) and on its website,
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A declaration that the MFI will be accountable for
preventing inappropriate staff behavior and timely grievance redressal
shall be made in the loan agreement and also in the FPC displayed in
its office/branch premises,
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The KYC Guidelines of RBI shall be complied with. Due
diligence shall be carried out to ensure the repayment capacity of the
borrowers,
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As specified in the NBFC-MFIs (Reserve Bank)
Directions, 2011, all sanctioning and disbursement of loans should be
done only at a central location and more than one individual should be
involved in this function. In addition, there should be close
supervision of the disbursement function,
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Adequate steps may be taken to ensure that the
procedure for application of loan is not cumbersome and loan
disbursements are done as per pre-determined time structure.
a. All NBFC-MFIs shall have a Board approved, standard
form of loan agreement. The loan agreement shall preferably be in
vernacular language.
b. In the loan agreement the following shall be disclosed.
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All the terms and conditions of the loan,
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that the pricing of the loan involves only three
components viz; the interest charge, the processing charge and the
insurance premium (which includes the administrative charges in respect
thereof),
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that there will be no penalty charged on delayed payment,
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that no Security Deposit / Margin is being collected from the borrower,
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that the borrower cannot be a member of more than one SHG / JLG,
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the moratorium between the grant of the loan and the
due date of the repayment of the first instalment(as guided by the
NBFC-MFIs(Reserve Bank) Directions, 2011),
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an assurance that the privacy of borrower data will be respected.
c. The loan card should reflect the following details as
specified in the Non-Banking Financial Company - Micro Finance
Institutions (Reserve Bank) Directions, 2011.
(i) the effective rate of interest charged
(ii) all other terms and conditions attached to the loan
(iii) information which adequately identifies the borrower and
(iv) acknowledgements by the NBFC-MFI of all repayments including installments received and the final discharge.
(v) The loan card should prominently mention the grievance
redressal system set up by the MFI and also the name and contact
number of the nodal officer
(vi) Non-credit products issued shall be with full consent
of the borrowers and fee structure shall be communicated in the loan
card itself.
(vii) All entries in the Loan Card should be in the vernacular language.
As specified in the NBFC-MFIs (Reserve Bank) Directions,
2011, recovery should normally be made only at a central designated
place. Field staff shall be allowed to make recovery at the place of
residence or work of the borrower only if borrower fails to appear at
central designated place on 2 or more successive occasions.
NBFC-MFIs shall ensure that a Board approved policy is in
place with regard to Code of Conduct by field staff and systems for
their recruitment, training and supervision. The Code should lay down
minimum qualifications necessary for the field staff and shall have
necessary training tools identified for them to deal with the
customers. Training to field staff shall include programs to inculcate
appropriate behavior towards borrowers without adopting any abusive or
coercive debt collection / recovery practices. Compensation methods for
staff should have more emphasis on areas of service and borrower
satisfaction than merely the number of loans mobilized and the rate of
recovery. Penalties may also be imposed on cases of non-compliance of
field staff with the Code of conduct. Generally only employees and not
out sourced recovery agents be used for recovery in sensitive areas.
As the primary responsibility for compliance with the
Directions rest with the NBFC-MFIs, they shall make necessary
organizational arrangements to assign responsibility for compliance to
designated individuals within the company and establish systems of
internal control including audit and periodic inspection to ensure the
same.
While lending to individuals against gold jewellery, NBFCs
shall adopt the following in addition to the general guidelines as
above.
i. They shall put in place Board approved policy for lending against gold that should inter alia, cover the following:
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Adequate steps to ensure that the KYC guidelines
stipulated by RBI are complied with and to ensure that adequate due
diligence is carried out on the customer before extending any loan,
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Proper assaying procedure for the jewellery received,
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Internal systems to satisfy ownership of the gold jewellery,
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The policy shall also cover putting in place adequate
systems for storing the jewellery in safe custody, reviewing the
systems on an on-going basis, training the concerned staff and periodic
inspection by internal auditors to ensure that the procedures are
strictly adhered to. As a policy, loans against the collateral of gold
should not be extended by branches that do not have appropriate
facility for storage of the jewellery,
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The jewellery accepted as collateral should be appropriately insured,
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The Board approved policy with regard to auction of
jewellery in case of non-repayment shall be transparent and adequate
prior notice to the borrower should be given before the auction date.
It should also lay down the auction procedure that would be followed.
There should be no conflict of interest and the auction process must
ensure that there is arm’s length relationship in all transactions
during the auction including with group companies and related entities,
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The auction should be announced to the public by issue
of advertisements in at least 2 newspapers, one in vernacular language
and another in national daily newspaper.
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As a policy the NBFCs themselves shall not participate in the auctions held,
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Gold pledged will be auctioned only through auctioneers approved by the Board.
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The policy shall also cover systems and procedures to
be put in place for dealing with fraud including separation of duties
of mobilization, execution and approval.
Ozg NBFC Consultant
Ozg Center | Delhi | Mumbai | Chennai | Bangalore | Kolkata
Back Office Phone # 09811415831-37-61-72-84-92-94
