There is a common misconception in the NBFC sector that the Fair Practices Code (FPC) is merely a policy document that needs to be approved by the Board and uploaded on the Company’s website.
But is that what RBI really expects? Certainly not.
The FPC is about how an NBFC treats its borrowers throughout the lending relationship, from loan application and sanction to documentation, disbursement, recovery and grievance redressal.
The RBI itself has described consumer protection as one of the two broad regulatory objectives of the NBFC framework, alongside financial-system stability. It specifically identifies the FPC as part of the conduct-of-business regulation designed to protect customers.
When RBI issued a show cause notice to the Company for non-compliances, the main question arises whether the Company had treated its borrower fairly and transparently?
To answer this question, Company need to show case its transparent lending practices, fair dealing with the customers and rights to hear in case of deficiency.
This imbalance between the lender and borrower is not new, the power gap is existing from a long.
When the Indian Contract Act was enacted in 1872, long before the RBI existed and NBFC term coined, before anyone wrote a Fair Practices Code — Sections 172 to 176 already imposed a duty on a pawnee to give reasonable notice before selling pledged goods. Which the FPC now says: a lender in possession of a borrower’s collateral holds a position of significant power, and that power carries a corresponding duty of fair dealing.
From then to now, the scale of operation has changed, NBFC now have, technology, legal/operational/collection team and expertise in running the business. The borrower on the other hand gets a KFS, a sanction letter, most important terms and conditions and a repayment schedule, and there is no mechanism by which the borrower can check the calculation with the disclosure made in the document with the lenders system.
In September 2006, the Fair Practices Code (FPC) was introduced through RBI guidelines and required every NBFC to adopt a Board-approved FPC.
In March 2012, RBI issued revised FPC guidelines in supersession of the 2006 circular.
RBI continued this approach through its Master Circulars (including 2015), the 2022 Digital Lending Guidelines, the 2023–24 requirements on penal charges, Key Facts Statements and interest charging, and the November 2025 Responsible Business Conduct Directions. The objective is to ensure that NBFCs deal with customers fairly, transparently and responsibly.
Consumer protection law was protecting borrowers a long before RBI introduced specific monetary penalties for FPC violations
The concept of an “unfair trade practice” was introduced through the 1984 amendment to the MRTP Act, 1969 and was later carried forward into the Consumer Protection Act, 1986. Today, Section 2(47) of the Consumer Protection Act, 2019 covers practices such as misleading price representations and deceptive descriptions of services.
So, if an NBFC misrepresents loan pricing to a borrower, it may not only violate RBI requirements but may also amount to an unfair trade practice under consumer law
In one of the cases, where the vehicle was allegedly repossessed by force, rather than through lawful legal process. The matter was dealt with as a “deficiency in service” before the consumer forum and later moved to the Supreme court, rather than as an RBI enforcement action.
An NBFC can face two separate consequences: regulatory action by RBI for violating its directions and consumer proceedings for deficiency in service or unfair trade practices. These are parallel remedies and can arise from the same conduct.
Major Area for the enforcement of risk.
Interest and Charges: Transparency Throughout the Loan
RBI does not prescribe the rate of interest to be charged for the loan; however, it should not be excessive. An NBFC is free to price risk commercially. The problem arises when customers cannot clearly understand what they are being charged and why.
RBI’s April 2024 circular on interest-charging practices identified issues such as charging interest from the date of sanction instead of actual disbursement, charging a full month’s interest for a part-month, and collecting advance instalments while calculating interest on the full loan amount. As per the RBI these are the system level problems and not the isolated issues.
The lesson is simple: if the company’s LMS is wrongly configured, the same mistake can affect thousands of customers.
Recovery Conduct: The Most Serious and Frequent FPC Risk
This is the most common reason for the RBI Enforcements orders passed in previous years, to introduce separate amendments dealing with the engagement of recovery agents.
RBI treats “repeat complaints” seriously. Repeated violations can turn an initial finding into a case of continued non-compliance and may result in stronger regulatory action.
The basic principle is that if a lender has the right to recover its money, but it cannot use any method it wants to recover it.
Recovery practices are risky because a single abusive call may create legal exposure under four different Acts, however consequences may vary on a case-to-case basis.
- RBI: Action for violation of the Responsible Business Conduct Directions, 2025.
- Consumer law: A borrower may approach the Consumer Commission for deficiency in service under the Consumer Protection Act, 2019.
- Criminal law: Threatening or intimidating a borrower may attract criminal liability under the Bharatiya Nyaya Sanhita, 2023.
- Data protection: Using a borrower’s phone contacts to identify or pressure family members may create issues under the Digital Personal Data Protection Act, 2023.
These laws may be handled separately from a compliance perspective, but the risk arises from the same incident.
Also, outsourcing recovery does not mean outsourcing the NBFC’s responsibility. RBI can still examine how the recovery agent was selected, what due diligence was done, what training was provided, how the agent was monitored, and how complaints were handled.
Grievance Redressal: A Growing FPC Risk
Till now the Grievance redressal has resulted in fewer FPC enforcement actions. However, it is now becoming a fast-growing area of regulatory concern.
The Integrated Ombudsman Scheme, 2021 has given RBI greater visibility into customer complaints through external channels such as the RBI Complaint Management System, in addition to the complaints recorded internally by an NBFC.
If the complaints reported by an NBFC do not match the complaints received through RBI’s channels, RBI may view this as under-reporting, which can become a governance issue rather than merely a customer-service issue.
RBI Regulatory observations have highlighted the importance of accurate reporting and proper handling of customer complaints. NBFCs must ensure that complaint-related information is correctly disclosed in their Annual Financial Statements and that complaints rejected fully or partly by the internal grievance redressal mechanism are referred to the Internal Ombudsman, wherever required.
Therefore, the complaints are not just cases to be closed; they are important data.
For example: If 100 customers complain about the same incorrect foreclosure charge, it may indicate a system or process problem, rather than 100 separate customer-service issues.
A strong compliance function should therefore not simply respond to and close complaints. It should track common patterns, identify the root cause, take corrective action and report significant issues to the Board or relevant committees.
This approach can help during RBI inspections and prevent similar issues from recurring.
How RBI Identifies FPC Violations
The policy can be board approved but RBI inspection starts with the practical approach in FPC compliances
RBI starts with the company’s financial and transaction data for a particular period and then traces actual customer transactions and processes.
The RBI may check the below to identify the gaps:
- Compare loan files with the Key Facts Statement and sanction letter;
- Check whether the interest actually charged matches what was disclosed;
- Review recovery call records against the company’s recovery policy and code of conduct;
- Check whether complaints were properly escalated to the Internal Ombudsman; and
- Compare the company’s internal complaint records with complaints received through RBI’s external systems.
- Can compare whether the charges levied are disclosed/informed to the customer while sanctioning the loan and it is understood by the borrower as well.
A violation can leave a data trail that RBI can identify, such as differences between the sanction date and disbursement date, the interest rate disclosed and the rate actually charged, or the recovery standards stated in the policy and the actual conduct of the recovery agent.
This is where the risk arises, the policy is saying one thing while the same is not aligned in the system and the operational staff is doing something else.
The April 2024 RBI circular on interest-charging practices is an example of how such system-level issues can be identified through supervisory examination, where the RBI illustrates how they find gaps at the time of the inspections.
Why an RBI penalty is only part of the risk
RBI enforcement is generally judged by the amount of the monetary penalty. However, the regulatory finding may have wider consequences, including closer monitoring, additional remediation and delays in regulatory approvals.
The escalation can be significant. For example, in past years, RBI directed certain NBFCs to stop sanctioning and disbursing fresh loans due to concerns over their pricing and income-assessment practices. This shows that RBI action can go beyond a financial penalty and directly affect the company’s ability to continue its business.
What a NBFC should identify when FPC is violated
The NBFC should ask five basic questions:
- Is it an isolated error or a system problem?
One incorrect account may be an operational error. The same error occurring again and again, reflect control failure. - Where did the problem originate?
It may arise from the policy, product design, system configuration, employee training, vendor supervision etc. - Has the customer suffered financial loss?
If yes, correcting the process for the future may not be enough. The affected customer may also need a reversal or refund. - What will prevent the problem from happening again?
System-based controls and automated checks are generally more reliable than controls that depend only on individual judgment. - Has the Board received the complete picture?
This is to be reflected in the board agenda, minutes and the parameter which the board had taken in consideration to analyse and resolve the issue
A strong FPC framework should therefore combine policy testing, transaction sampling, system checks, complaint analysis, vendor monitoring and customer review. The objective is not merely to complete a checklist but to identify and control the actual risk.
The Real Purpose of the FPC
At its core, the Fair Practices Code asks a simple question? Is the customer actually being treated fairly throughout the lending relationship?
This includes everything from the interest charged and fees collected to the recovery call and handling of complaints, the Consumer Protection Act, 2019 and the RBI Act, 1934 together reflect a broader principle: a borrower’s vulnerability cannot simply be treated as a business opportunity.
FPC compliance is therefore not about doing borrowers a favour. It is about ensuring that the NBFC’s systems, employees, agents and processes deliver the fair treatment required by law.
The real test of FPC compliance is how the NBFC charges EMIs and interest, manages recovery and treats customers when they raise complaints.
[1] Functions and Working of RBI
[2] Indian Contract Act, 1872
[3] DoS.CO.PPG.SEC.1/11.01.005/2024-25the OFS.
The article is written by Mr. Ashok Pathak.