NBFC

Disclosures in Loan Agreement of NBFC-Mfis

Non-banking financial Companies – Micro Finance Institutions have to follow RBI regulations, and the rules related to loan agreements were discussed in the Fair Practices Code direction. The instructions are systematically created for non-deposit-taking businesses. Depending on the type of NBFC, the RBI advises additional rules. Disclosure in loan agreements is crucial to maintain transparency and clarity between the Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) and the borrower. These explanations assist borrowers in understanding the terms and circumstances of the loan, their rights and obligations, and the costs of borrowing. This blog will discuss the disclosures in loan agreement of NBFC-MFIs.

Disclosures in Loan Agreement/Loan Card

• All NBFC-MFIs must use a common loan agreement that the board has approved. Preferably, the loan agreement will be written in vernacular language.

• The following information must be given in the loan agreement.
  • All the terms and conditions of the loan. 
  • The pricing of the loan consists only of three components: interest, processing fees, and insurance premiums (which include administrative fees related thereto).
  • There will be no penalties for late payments,
  • No security deposit or margin is being collected from the borrower, 
  • The borrower cannot be a member of more than one SHG (Self-Help Group) or JLG (Joint Liability Group). 

• According to the Non-Banking Financial Company – Micro Finance Institutions (Reserve Bank) Directions, 2011, the loan card must display the information below.

• The effective interest rate charged 
  • All other loan-related terms and conditions information that correctly identifies the borrower; Acknowledgements of all repayments, including instalments received and the ultimate discharge by the NBFC-MFI.
  • The loan card shall prominently state the MFI’s established grievance procedure as well as the name and contact information of the nodal officer.
  • Non-credit products must be issued with the borrowers’ full authorisation, and the fee schedule must be disclosed on the loan card itself.
  • The vernacular language must be used for all entries on the Loan Card.

Non-Coercive Methods of Recovery 

Recovery must typically only be done at a single, specified location. Only if the borrower repeatedly fails to show up at the central specified location will field workers be permitted to make a recovery at the borrower’s place of home or work. 

NBFC-MFIs must ensure that field employee recruiting, training, and monitoring systems are in place and that a Board Approved policy is in place regarding the field staff code of conduct. The code must specify the minimum requirements for field personnel and must specify the appropriate training materials so they can interact with clients. Programmes to teach field workers how to treat borrowers with respect and without using forceful or abusive methods shall be included in their training.

Employee compensation plans should emphasise areas of service and borrower satisfaction rather than just the volume of loans mobilised and the speed of recovery. If field staff fails to follow the Code of Conduct, penalties may also be levied. Only workers should be employed for recovery in sensitive regions, not outside recovery agents.

Requirements Related To Loans for NBFC-Mfis

The Non-Banking Financial Company-Micro-Finance Institution (NBFC-MFI) is a financial institution that does not accept deposits and has a minimum of 85% of its assets in the form of qualifying assets. The assets that will take significant time to be ready for their intended use or sale are known as qualifying assets.

The following requirements must be met, according to the RBI, for a non-banking financial company to be recognised as a microfinance institution:

• Loan to be disbursed to the borrower in a rural home, their yearly income cannot exceed Rs. 1,000,000; if they reside in an urban or semi-urban household, their annual income cannot exceed Rs. 1,60,000
• A loan cannot be for more than Rs 50,000 in the initial cycle and Rs 1,000,000 in subsequent cycles.
• Loan terms for sums greater than Rs 15,000 (with prepayment without penalty) cannot be shorter than 24 months.
• The borrower’s total debt cannot be more than Rs 1,000,000.
• No collateral is required for the loan to be given.
• A total of all loans made for income generation must represent at least 50% of all loans made by the MFI.
• The borrower can pay back the loan weekly or monthly, depending on the borrower’s choice.

Therefore, any non-banking finance company can carry out the functions of a micro-finance institution by meeting all the aforementioned requirements.

Necessary Compliances 

The RBI requires every NBFC MFI to join at least one Credit Information Company (CIC) that was created in accordance with the CIC Regulation Act of 2005¹. Give the CICs timely and accurate data, and make use of the information they have at their disposal to ensure that the requirements for Joint Liability Group/Self Help Group membership, level of debt, and funding sources are met. Most of these conditions will be complied with due to such membership.

Conclusion

The loan agreement should include the necessary legal and regulatory requirements mandated by the Reserve Bank of India (RBI). NBFC-MFIS must make sure loan agreements are written in simple, understandable language and free of legal jargon. Prior to signing the contract, borrowers should have the chance to evaluate it and ask questions about any terms and conditions. Additionally, they have to comply with necessary legal requirements and regulatory norms.

FAQ

Read Our Article: Sample Format of Loan Agreement

1. https://financialservices.gov.in/sites/default/files/CIC%20Act%202005.pdf