Fair Practices Code (FPC) for NBFC-MFIs

Swetha Dhinesh

13 Jun, 2023

The Reserve Bank of India (RBI) has issued the regulation on Fair Practices Code for Non-Banking Finance Companies (NBFCs), thereby setting standards for fair business and corporate practices while dealing with their customers. The Company is required to follow all best practices recommended by RBI from time to time and to modify according to the code as necessary to comply with those standards. 

Micro Finance Institutions are financial institutions that offer financial services and loans to the poor sections of society. Their primary target markets for small loans are low-income individuals in rural and urban areas. This blog will discuss the fair practices code for Non-Banking Financial Companies – Micro Finance Institutions. 

Language and communication methods of Fair Practise Code 

All NBFCs shall implement a fair practises code, ideally in the vernacular or a language that the borrower can understand. This code must have the Board’s approval. The Fair Practises Code may be freely created by NBFCs, who may broaden the scope of the rules without in any way compromising the principles behind the said regulations. If they have a website, the same information should be posted there for the benefit of all interested parties.

Duty of the Board of Directors

The Board of Directors shall establish regular reviews of the Fair Practices Code’s compliance and the effectiveness of the grievance redressal process at various management levels. The Board may request a consolidated report of these reviews at regular intervals as it sees fit.

Fair Practices Code of NBFC-MFIs

NBFC-MFIs are required to follow the fair practices listed below because they are unique to their lending operations and regulatory environment.

General Fair Practices

• An NBFC-MFI shall display the FPC in vernacular language in its office and branch premises, 
• An NBFC-MFI shall make a statement in vernacular language and display it on its premises and on loan cards outlining its commitment to transparency and fair lending practices,
• Field personnel must get training to conduct the relevant inquiries regarding the borrowers’ outstanding debt.
• Any training provided to borrowers will be provided at no expense. Field employees must be trained to provide this training and thoroughly inform borrowers of the processes and procedures for loans and other goods.
• All of the NBFC-MFI’s offices and any material it produces (in local languages) should prominently show the effective rate of interest charged and the grievance redressal system it has established.
• The loan agreement and the FPC posted in the MFI’s office/branch premises must state that the MFI is responsible for stopping inappropriate staff behaviour and promptly resolving grievances.
• The RBI’s KYC Guidelines must be followed. To assure the borrowers’ repayment capacity, due diligence must be done.
• As stated in the NBFC-MFIs (Reserve Bank) Directions, 2011¹, all loan sanctions and disbursements should only be carried out in one central location and require the participation of some people more than one individual for this function. The loan disbursement function should also be closely monitored, and
• Appropriate measures must be taken to ensure that the loan application process is straightforward and that loan disbursements are completed within the allocated time frame.

Disclosures in the loan agreement or loan card

(a) A standard loan agreement that the Board has approved must be used by all NBFC-MFIs. Preferably, the loan agreement will be written in vernacular language.

(b) The loan agreement should include the following information: 

• All terms and conditions of the loan.
• The fact that there are only three costs associated with the loan—interest, processing fees, and insurance premiums (they all include administrative fees).
• There will be no penalties for late payments, 
• The borrowers are not required to pay a security deposit or margin, and
• The borrower is not permitted to be a member of more than one organization.
• The moratorium period (as governed by the NBFC-MFIs(Reserve Bank) Directions, 2011) between the date the loan is granted and the due date of the first installment repayment
• The privacy of the borrower’s data will be guaranteed and respected.

(c) According to the Non-Banking Financial Company – Micro Finance Institutions (Reserve Bank) Directions, 2011, the loan card should include the following information: 

• The effective rate of interest charged, 
• All other loan terms and conditions,
• Information that sufficiently identifies the borrower and acknowledgments by the NBFC-Micro Finance Institutions of all repayments, including installments received and the final discharge.
• The MFI’s established grievance procedure and the name and contact information of the nodal person should be prominently displayed on the loan card.
• The pricing structure for any non-credit products must be disclosed in the loan card itself, and all entries must be made in the local language. 
• Non-credit products may only be supplied with the complete consent of the borrowers.

Non-Coercive Recovery Techniques

Recovery should typically only be made at a central location, as stated in the NBFC-MFIs (Reserve Bank) Directions, 2011, which was published in 2011. 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 employment.

NBFC-MFIs must make sure that a Board-approved policy is in place on the field staff’s code of conduct and the procedures for hiring, educating, and supervising them. The code should specify the minimum requirements for field personnel and identify the training materials they need to interact with clients. Training for field employees must include programs to teach appropriate behaviour towards debtors without using aggressive or abusive debt collection or recovery tactics. 

The areas of service and borrower satisfaction should be given greater weight in staff compensation systems than just the volume of loans mobilized and the percentage of the recovery. If field staff fails to follow the Code of Conduct, penalties may also be levied. Only staff and not outside recovery agents should be employed in sensitive areas.

Internal control system

Since the NBFC-MFIs are primarily responsible for ensuring that the Directions are followed, they must establish systems of internal control, including periodic inspection and audit, and make the necessary organizational arrangements to assign responsibility for compliance to designated employees within the organization.

Conclusion

The fair practices code is a code of conduct that NBFC must abide by when dealing with their clients and was issued by the Reserve Bank of India. The fair practice provides NBFCs with the framework to guarantee fair treatment of customers and safeguard their interests. It encourages openness, prudent lending methods, and efficient grievance procedures, ultimately creating trust and confidence in the NBFC sector.

Read Our Article: RBI Guidelines for Fair Practice Code of NBFCs

1. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6857&Mode=0