RBI Guidelines for Fair Practice Code of NBFCs

Tanya Verma

02 Jan, 2021

Fair Practice Code of one industry is different from that of another. It states that the sector is working according to the guidelines of the prescribed regulatory authority. While, in case of NBFC, the Reserve Bank of India regulates guidelines for Fair Practice Code of NBFC^[1]. Furthermore, it also says that they are not doing any activity that the RBI has prohibited from doing. In this blog, we are going to learn about those guidelines in terms of the Non-Banking Financial sector. 

What is the Fair Practice Code?

Fair Practice Code of any industry justifies the functioning of that industry in compliance with the guidelines of the Reserve Bank of India {RBI} and they are not carrying out any such work which is prohibited/ barred/ forbidden by the RBI.

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What is the Objective of Fair Practice Code?

The main purpose of using the Fair Practices Code is to;

1. Adapt practices which are best for dealing with the customer
2. Ensuring customer satisfaction by setting new standards and achieving them
3. Following methods of operating business that is transparent, fair, ethical, and legally justifiable
4. Providing business-related information to the public which is in their interest this practice promotes mutual beneficial long term relationship
5. Avoid using unfair practices

Fair Practice Code Guidelines for NBFC Directed by the RBI

Fair Practice Code guidelines for NBFCs as directed by the RBI are as follows;

Fair Practice Code related to / in terms of Loan;

1. Application for a loan and its processing:
   1. The means of conveyance to the borrower should be in the vernacular language i.e. in a language that anyone can easily understand
   2. The loan application forms should contain the necessary details which are in the interest of the borrower so that they can compare various terms and conditions provided by the NBFC and can take a decision after gaining knowledge of every detail
   3. The NBFCs should formulate a system of providing the Acknowledge for Receipt for all loan application forms they receive 
2. The terms and conditions of the loan appraisal:
   1. The NBFC should present in writing and in a vernacular language the sanctioned loan amount with all the terms including the annualized rate, interest and the way of application.
   2. It should keep the acceptance of all these conditions by the borrower in its records
   3. If the NBFC does not provide the loan agreement to the borrower, it could lead to a dispute between both the parties
3. Any change in disbursement should be notified:
   1. The NBFCs should notify the borrower in the vernacular language if there is any change in the payment schedule, interest rate, service change, payment charges, etc.
   2. The decision to accelerate/ recall payment or performance under the agreement should be in unison with the loan agreement
   3. It is also suggested for NBFCs to release all securities on repayment of all the dues/realization of the outstanding amount of loan that is subject to any legitimate right

Fair Practice Code related to Gold Loan:

1. The NBFC should complete adequate KYC procedure due diligence of the customer
2. To satisfy the owner of the gold to the borrower the NBFC will conduct internal procedures
3. NBFC shall ensure adequate systems have been made within the company to safely store the jewelry that has to be inspected periodically by the internal auditor
4. There should be proper insurance of gold
5. The auction process should be transparent.
6. Furthermore, NBFCs are not allowed to take part in auctions
7. Moreover, the loan agreement shall display all the details regarding the auction

General Regulations:

• NBFCs are not allowed to interfere in the borrower’s affairs except those mentioned in the terms and conditions of the loan agreement
• If the Lending NBFC has any objection related to receipt of a request from the borrower, for transfer of their account, then it should convey it within 21 days from the date of the receipt
• The lending NBFC must not use any measures which may be addressed as harassment for the recovery of loan
• The responsibility of the Board of Directors is to review the Fair Practice Code and lay down proper grievance redressal mechanism in the organization
• The Fair Practice Code used by the NBFC should be mentioned wherever possible in the loan agreement taking the consent from the Board of Directors.

Conclusion

Fair Practices Codes are regulatory practices used in companies to keep an eye on their functioning. It is suggested by the Reserve Bank of India and the companies, for which these rules are made, must comply with these guidelines. The implication of these rules is to make sure that the functions of the companies are in the interest of the people. Also, to make sure no such activity is performed by the companies which are not in compliance with the guidelines set by the RBI. There are certain guidelines set by the RBI specifically for the NBFC sector which they must obey. Furthermore, the NBFCs should refrain from using harassing behaviors to recover loans, such as calling at odd hours, use muscle power or any other similar activity.    

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