News: Indian NBFCs may pen fair practice code

(BS 05/10/2006) Mumbai - The Reserve Bank of India (RBI) has asked non-banking finance companies (NBFCs) to put in place a board-approved fair practices code within the next one month to ensure their customers take informed borrowing decisions.

The RBI said the code should be based on its guidelines concerning loan processing, terms and conditions for disbursement and recovery procedures.

The NBFCs have been told that the code should specify that in the matter of recovery of loans, they would not resort to undue harassment by persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans , and other means.

NBFCs have been told that loan application forms should include necessary information which affects the interest of the borrower, so that a meaningful comparison with the terms and conditions offered by other NBFCs can be made and informed decision are taken by borrowers. The loan application form may indicate the documents required to be submitted with the application form.

NBFCs also need to devise a system of giving acknowledgement for receipt of all loan applications. Preferably, the time frame within which loan applications will be disposed of should also be indicated in the acknowledgement.

The NBFCs are also required to convey in writing to the borrower by means of sanction letter or otherwise, the amount of loan sanctioned along with the terms and conditions including annualised rate of interest and method of application thereof and keep the acceptance of these terms and conditions by the borrower on its record.

They will also need to give notice to borrowers of any change in the terms and conditions including disbursement schedule, interest rates, service charges, prepayment charges etc.

The firms should also ensure that changes in interest rates and charges are effected only prospectively. A suitable condition in this regard should be incorporated in the loan agreement. RBI said any decision to recall/accelerate payment of the loan should be in consonance with the loan agreement.

NBFCs have been told incorporate in their code a principle that they will release all securities on repayment of all dues or on realisation of the outstanding amount of loan subject to any legitimate right or lien for any other claim NBFCs may have against borrower.

If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which NBFCs are entitled to retain the securities till the relevant claim is settled/paid.