What changed
RBI issued a master circular consolidating all existing fair practices instructions for NBFCs and RNBCs as of June 30, 2010. The circular updates and replaces earlier notifications listed in the appendix, bringing all current guidelines into one document. It reiterates that NBFCs must have a Board-approved Fair Practices Code in place, originally required by September 28, 2006.
What it means for you
NBFCs must ensure their loan application forms include all necessary information for borrowers to compare terms with other lenders. They must provide a copy of the loan agreement and all enclosures at sanction/disbursement, and any changes in interest rates or charges must be applied only prospectively. This reduces disputes and enhances transparency, but requires NBFCs to update their processes and documentation.
What you must do
- Review and update your Fair Practices Code to align with the master circular's guidelines, and get Board approval if not already done.
- Ensure loan application forms include all key terms and conditions, and provide an acknowledgement with a disposal timeframe.
- Provide borrowers with a copy of the loan agreement and all enclosures at the time of sanction or disbursement.
- Communicate any changes in terms (e.g., interest rates, charges) only prospectively and incorporate this in loan agreements.
- Release all securities upon full repayment, unless a legitimate lien or set-off right exists.
Who it affects
All Non-Banking Financial Companies (NBFCs), Residuary Non-Banking Companies (RNBCs), Borrowers of NBFCs/RNBCs
What is the deadline for implementing the Fair Practices Code?
The original deadline was one month from September 28, 2006. This master circular consolidates existing instructions, so NBFCs should already have a Board-approved code in place.
Do we need to provide a loan agreement copy to the borrower?
Yes, the circular mandates that NBFCs must furnish a copy of the loan agreement along with all enclosures quoted in it to the borrower at the time of sanction or disbursement.
Can we change interest rates retrospectively?
No, changes in interest rates and charges must be effected only prospectively. A suitable condition should be included in the loan agreement.