Recently, the Reserve Bank of India (RBI), with a view to implement more transparency in the country’s credit system and for customer protection, prescribed broad guidelines with respect to fair practices, to be formulated and approved by the Board of Directors of all Non- Banking Financial Companies (NBFCs) including residuary, non-banking companies (RNBCs).
Pursuant to RBI’s Circular dated 28th September 2006, NBFCs including RNBCs would have to comply with the following guidelines:
Provide adequate information affecting the interest of borrowers in order to enable a borrower to make an informed decision. Such information should be clearly included in the loan application forms, pursuant to which, a meaningful comparison may be made with the terms and conditions offered by other NBFCs.
A mechanism of acknowledging receipt of loan applications by NBFCs should be devised which should include the time frame for disposal of such loan applications.
The borrower should be intimated in writing, whether by way of a sanction letter or otherwise, the amount of loan sanctioned, annual rates of interest along with the method of application thereof.
Any alteration or modification in the terms and conditions such as disbursement schedule, interest rates, service charges, prepayment charges etc. should be notified to the borrower by the NBFC. The NBFC would be required to ensure that changes in relation to interest rates and charges be brought into effect prospectively.
All securities on repayment of all dues or on realisation of the outstanding amount of the loan should be released by the NBFC subject to any legitimate right or lien for any other claim, which the NBFC may have against the borrower.
The NBFC should refrain from interfering in the affairs of the borrower except to the extent required by the loan agreement.
The consent or objection of the NBFC, upon receipt of a request from the borrower for transfer of the borrowal account, should be communicated within 21 days from the date of receipt of request.
As regards recovery of loans, NBFCs should not resort to undue harassment of borrowers.
An appropriate grievance redressal mechanism should be established within the organization by the Board of Directors of the NBFC for resolution of disputes, which should ensure that all disputes arising out of the decisions of lending institutions' functionaries are heard and disposed of at the next higher level.
Such fair practices code based on the above guidelines are required to be effected by all NBFCs with the approval of their Boards within one month from the date of the circular.
NBFCs have been granted freedom to draft the fair practices code and enhance the scope of the guidelines without in any manner sacrificing the underlying meaning and purpose of the guidelines.
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