What changed
RBI issued a master circular consolidating all prior Fair Practices Code instructions for NBFCs and RNBCs as of June 30, 2013. It incorporates earlier guidelines from 2006 and the revised circular of March 26, 2012, which added provisions for NBFC-MFIs and gold loan lending. The circular emphasizes vernacular language communication, disclosure of annualized interest rates, and penal interest in bold in loan agreements.
What it means for you
NBFCs must now ensure all loan communications and agreements are in a language the borrower understands, preferably vernacular. They must disclose annualized interest rates and penal charges prominently in loan documents. This increases transparency and reduces disputes, but also raises compliance costs for lenders, especially those dealing with gold loans or microfinance.
What you must do
- Update loan application forms to include all key terms and list required documents.
- Provide written sanction letters in vernacular language with annualized interest rate and penal charges in bold.
- Furnish a copy of the loan agreement and all enclosures to borrowers at sanction/disbursement.
- Implement a system to acknowledge loan applications with a disposal timeframe.
- Ensure board-approved policies for gold loan lending and auction procedures are in place.
Who it affects
All Non-Banking Financial Companies (NBFCs), Residuary Non-Banking Companies (RNBCs), NBFC-MFIs, NBFCs lending against gold jewellery
What language must NBFCs use in loan communications?
All communications to borrowers must be in the vernacular language or a language the borrower understands, including sanction letters and loan agreements.
What must be disclosed in bold in the loan agreement?
The penal interest charged for late repayment must be mentioned in bold in the loan agreement.
Are NBFCs required to give a copy of the loan agreement to borrowers?
Yes, NBFCs must furnish a copy of the loan agreement and all enclosures quoted in it to all borrowers at the time of sanction or disbursement.