Internal Ombudsman Scheme mandated for NBFCs

Ashish M. Shaji

21 Oct, 2021

The RBI recently announced the introduction of Internal Ombudsman Scheme for certain categories of NBFCs. The RBI said that it has planned to introduce the Internal Ombudsman Scheme for NBFCs with higher customer interface to strengthen the internal grievance redressal mechanism of Non-Banking Financial Companies.

Who is an Ombudsman?

An ombudsman refers to the representative of the people who address their complaints, conduct an investigation and solve disputes through recommendations or through mediations. Ombudsman is derived from the Swedish word ‘ombud’, which means an officer or commissioner.

What is Internal Ombudsman Scheme?

Internal Ombudsman Scheme-2018

With a view to ensure transparency and consumer friendliness, the RBI introduced this scheme in 2018 for scheduled commercial banks^[1]. The ombudsman scheme is complemented by the IO grievance redressal mechanisms that permit the regulated entities with increased freedom to take up consumer grievances on an individual level and fast track dispute resolution process.

Under this scheme, the complaints of the consumers are forwarded to the internal ombudsman, thereby reduces the issue for consumers to file complaint directly. The ombudsman takes up the complaints on the grounds allowed by the RBI and extends resolution through mediation or award. The internal audit mechanism oversees the functioning of the IO with the RBI regulatory framework.

Ombudsman Scheme for NBFCs

This scheme for NBFCs was modelled after the Banking Ombudsman Scheme of 2006. It was introduced to deposit taking NBFCs with an asset size of minimum 1 crore rupees with a customer interface. Later on, the scheme was expanded to include non-deposit taking NBFCs as well having assets worth more than 1 crore rupees.

The need for an Internal Ombudsman Scheme

NBFCs role in providing finance to sectors such as MSME, microfinance, housing, vehicle finance has been a crucial one and has effectively complemented the efforts of the banks through the last mile financial intermediation. The Central Bank further observed that various NBFCs have successfully adopted digital modes to support delivery of financial products and services to wide customer base.

The RBI said that the need for Internal Ombudsman Scheme arose considering the increased significance, strength and reach of NBFCs in the country. Therefore there was a need to have better customer experience, including grievance redressal practices.

In the last few years, the Reserve Bank has introduced various measures towards consumer protection and grievance redressal of customers of NBFCs which includes requiring from NBFCs to appoint Nodal officers for grievance redressal and the launch of the 2018 Ombudsman scheme for NBFCs.

The RBI stated that the Internal Ombudsman scheme for NBFCs will be on the lines of IOS for banks and non-bank payments system participants. It will require from some NBFCs to appoint an Internal Ombudsman at the top of their internal grievance redress mechanism to examine complaints from the customers that are in the nature of deficiency in service and is either partly or wholly rejected by the Non-Banking Financial Companies.

Grounds of Complaint

If we refer to the Clause 8 of the Ombudsman Scheme for NBFCs 2018, the NBFC ombudsman receives and considers the following types of complaints:

• Non-payment or inordinate delay in the payment of interest on deposits;
• Not adhering to the RBI directions, if any, which is applicable to the rate of interests on deposits;
• Non-payment or inordinate delay in repaying deposits;
• Non-representation in the presentation of post-dated cheques provided by the customer;
• Failure to convey in writing, the loan amount sanctioned with the T&C, including annualised rate of interest and method of application thereof;
• Refusal or failure to provide adequate notice on changes proposed in sanctioned T&C in vernacular language as understood by the borrower;
• Failure or inordinate delay in releasing securities/documents to borrower on repayment of dues;
• Levy of charges without notice to the borrower/customer;
• Failure to provide legally enforceable built-in clause of repossession in the contract/loan agreement;
• Failure to maintain transparency in the contract/loan agreement regarding- notice period before taking the possession of security, circumstances wherein the notice period can be waived, the procedure for taking possession of the security, provision of final opportunity to be provided to the borrower for repaying loan before the sale/auction of the security, the procedure for providing repossession to the borrower and the procedure for sale/auction of security;
• Not observing the directions of the RBI to NBFCs;
• Not adhering to the provisions of RBI guidelines of Fair Practices Code for NBFCs.

Conclusion

So, to sum up, the RBI will introduce the Internal Ombudsman Scheme for NBFCs with higher customer interface. The RBI further said in a statement that detailed instructions in this regard will be issued separately.

Read our article:RBI changes Rules for Loan Transfer for Banks, NBFCs