Why the Fair Practices Code?
The primary business activity of a Non-Banking Financial Company (NBFC) is to grant loans to its customers. NBFCs and other financial institutions adopt different means to attract the borrowers to scale up their business. With a view to protect the rights of the borrowers and to ensure proper conduct of business, the Reserve Bank of India (RBI) has issued Fair Practices Code (hereinafter referred to as “Code”).
RBI vide its circular dated 5th May 2003 had issued guidelines on the Code. Thereafter, numerous modifications have been carried out in the guidelines issued in this regard keeping in mind the need to protect the interests of the borrowers and to ensure transparency while dealing with the customers so that no undue advantage is taken, and customers are able to take a well-informed decision.
Items covered under Fair Practices Code:
RBI has issued its updated circular on Fair Practices Code on 1st July 2015[1]. The Code covers the various aspects of loan lending process as follows:
- Applications for loans and their processing: All the communications to the borrower shall be in vernacular language or a language as understood by the borrower. The loan application shall set forth all the terms and conditions and all the information that would affect the interest of the borrowers in a transparent manner so that the borrowers can take a well-informed decision. Also, the acknowledgement on receipt of the loan application and the timeframe for disposal shall be given.
- Loan appraisal and terms/conditions: The sanction letter shall specify all details regarding the loan sectioned including annualized rate of interest so that the borrower is aware of the exact rates that would be charged to the account, the approach for gradations of risk and rationale for charging different rate of interest to various categories of borrowers. Further, the penal interest charged for late repayment shall be mentioned in bold in the loan agreement. Also, a copy of the loan agreement along with a copy of each of all enclosures quoted in the loan agreement at the time of sanction / disbursement of loans shall be given to the borrower.
- Disbursement of loans including changes in terms and conditions: A notice shall be given to the borrower of any change in the terms and conditions including disbursement schedule, interest rates, service charges, prepayment charges etc. Further, changes in interest rates and charges should be effected only prospectively and suitable conditions in this regard should be incorporated in the loan agreement. In case of loan taken against securities, the NBFC shall release all securities on repayment of all dues or on realization of the outstanding amount of loan subject to any legitimate right or lien for any other claim the NBFC may have against the borrower. Further, a notice must be given if such right of set off is to be exercised, specifying the remaining loan amount and the conditions under which the NBFC is entitled to retain the securities till the relevant loan amount is settled/ paid.
- General Conditions At the time of recovery of loans, the NBFCs should not resort to undue harassment viz; persistently bothering the borrowers at odd hours, use muscle power for recovery of loans etc. The people dealing with the customers of the NBFC, including the staff, selling agents and recovery agents appointed should be trained to deal with the customers in a proper manner. Also, no discrimination should be done based on gender, caste, or religion.
Duties of the Board
Now, having understood the wide coverage, it would be pertinent to know the duty that is cast upon the Board in this regard.
Although NBFCs have the freedom of drafting the Code, the Board shall satisfy itself that the Code is aligned with the RBI guidelines issued for Fair Practices Code. Once the Board approves it, the same shall be disclosed on the website of the Company, if any.
Further, a grievance redressal mechanism shall be set up within the organization and a periodical review with respect to the compliance and functioning of the grievances` redressal mechanism shall be carried out by the Board to ensure that all disputes are heard and resolved efficiently.
Grievance Redressal Mechanism
The name and contact details of the Grievance Redressal Officer responsible for resolving customer complaints shall be displayed at the respective branches of the NBFC. Further, If the complaint / dispute is not redressed within a period of one month, the customer may appeal to the Officer-in-Charge of the Regional Office of DNBS of RBI, under whose jurisdiction the registered office of the NBFC falls. The details of such RBI Officer-in-Charge shall also be displayed at the respective branches of the NBFC.
Consequences of non-compliance
Under the Code, there is no specific penalty provision mentioned for violation of the Code. However, RBI is empowered to impose a penalty under provisions of section 58G (1)(b) read with sub-section 5(aa) of section 58B of the RBI Act, 1934 for failure to comply with the provisions applicable to NBFCs.
There have been cases where concerns have been raised by the customers relating to mis-selling, breach of confidentiality and security of customer information, charging exorbitant interest rates and harassment by recovery agents. To avoid such issues RBI has taken strict action against those who have violated the code.
In April 2017[2], RBI had imposed a monetary penalty of Rs. 5 lakhson an NBFC as it was observed that charging of interest and its communication to the customers was not done in a transparent manner, which was in violation of the Code. RBI further imposed a penalty of Rs. 20 lakhson another NBFC for violation of various provisions of the Code.
In January 2019[3] RBI had imposed a monetary penalty of Rs. 1 croreon an NBFC which is a major market player for violation of the Code.
In February 2023[4] RBI had imposed a penalty of Rs. 42.48 lakhson a NBFC, as the company failed to ensure that its recovery agents did not resort to harassment or intimidation of customers as part of its debt collection efforts and thereby fail to adhere to the Code. There were also persistent/repeat complaints about harassment of customers due to the recovery and collection methods adopted by the company.
Way Forward
When it comes to following the Code, NBFCs need to take care that it is adhered to not only in letter but also in spirit. The penal action taken by RBI not only damages the brand image of the NBFC, but also affects the confidence and the trust that the customers have in the Company, which would in turn drastically affect the business of the Company. The success of a business depends on its customers as without customers there is no business and therefore, Companies should ensure that their business practices are ethical and are customer driven.
[1] Source: Master circular on Fair Practices Code issued by RBI vide notification dated
DNBR (PD) CC.No.054/03.10.119/2015-16
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9823&Mode=0
[2] RBI press release 2016-2017/2742 and 2016-2017/2741 dated 11 April 2017
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=40119
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=40120
[3] RBI press release 2018-2019/1645 dated 14 January 2019
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46003
[4] RBI press release 2022-2023/1662 dated 03 February, 2023 https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=55160
The Article is published in Taxmann and the same can be accessed on the following link:
The article is written by
Rebacca Salve – Manager – rebaccasalve@mmjc.in
Deepti Yavagal Kulkarni – Partner – deeptiyavagal@mmjc.in