Last updated: December 17th, 2019 3:40 PM

 RBI Fair Practices Code for Lenders

In order to protect bank loan borrowers from unfair lending practices and to hold banks / financial institutions to higher levels of ethical practices, the Reserve Bank of India (RBI) implemented the Fair Practices Code for Lenders in 2003. The guidelines for lending have been finalised and banks/financial institutions have adopted the broad guidelines and framework prescribed in the RBI Fair Practices Code. Banks or Financial Institutions have the freedom of drafting the Fair Practices Code, enhancing the scope of the guidelines, but in no way sacrificing the spirit underlying the following guidelines prescribed by RBI.

Guidelines for Processing Loan Applications

All banks and financial institution must process a loan application based on the following minimum guidelines:

• Banks and financial institutions should provide acknowledgement for receipt of all loan applications.
• Banks and financial institutions should process the loan applications within a reasonable period of time. If additional details or documents are required, they should intimate the borrowers immediately.
• Banks and financial institutions should not discriminate on grounds of sex, caste and religion in the matter of lending. However, this does not preclude lenders from participating in credit-linked schemes framed for weaker sections of the society.

For following additional guidelines are prescribed for borrowers applying for a loan of upto Rs.2 lakhs:

• Loan application forms in respect of priority sector advances up to Rs.2.00 lakhs should be comprehensive. It should include the following information to help the borrower make a meaningful comparison with other lenders:
  • Fees/charges, if any, payable for processing;
  • Interest chargeable;
  • Amount of fees refundable in the case of non-acceptance of loan application;
  • Pre-payment options
  • Time frame for process of loan application;
  • Any other matter which affects the interest of the borrower
• In case of rejection of loan application for a small borrowers seeking loan of upto Rs. 2 lakhs, then the Banker or Financial Institution must convey in writing, the main reason for rejection of loan application.

Guidelines for Appraisal and Loan Terms

The following guidelines have been prescribed for loan appraisal by banks:

• Banks and financial institutions must properly assess all loan application and borrower credit worthiness. Margin money or security provided should not be used as a substitute for due-diligence on credit worthiness of a borrower
• In the case of a loan being processed by a consortium of Bankers or Financial Institutions, then the participating lenders should evolve procedures to complete appraisal of proposals in a time bound manner to the extent feasible, and communicate their decisions on financing or otherwise within a reasonable time.

In case of sanction of loan by Banks, then the following guidelines should be followed while communicating the terms and conditions of the loan:

1. The lender should convey to the borrower, the credit limit along with the loan terms and conditions.
2. A copy of the loan terms and conditions with the borrower's acceptance should be kept on record by the Bank with the full knowledge of the borrower.
3. A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement should be furnished to the borrower.
4. In case of any changes in terms and conditions or other caveats governing the loan facility due to negotiations, the same should be in writing and duly certified by the authorised official. A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement should be furnished to the borrower.
5. The loan agreement should clearly stipulate credit facilities that are solely at the discretion of lenders.

Guidelines for Loan Disbursement & Post-Disbursement

The following guidelines must be followed during loan disbursement:

• On sanction of loan and completion of documentation, the lender should ensure timely disbursement of loans sanctioned, inline with the terms and conditions of the loan.

The following guidelines must be followed post-loan disbursement, during the loan collection process:

• In case of any changes in terms and conditions including interest rates, service charges etc, the Bank or Financial Institution should give notice to the Borrower. Also, all changes to interest rates and charges can be effected only prospectively.
• The bank or financial institution should restrain from interference in the affairs of the borrowers, except for what is provided in the loan documents.
• In case of loans of upto Rs.2 lakhs, then the Bank or Financial Institution should supervise with a constructive view to taking care of any" lender-related" genuine difficulty that the borrower may face.
• In case of request for transfer of loan account, consent of the lenders should be conveyed within 21 days from the date of receipt of request.
• Bank or financial institution must release all securities on receiving payment of loan or realisation of loan, subject to any legitimate right or lien for any other borrowing of the same borrower. If the bank or financial institution uses such right for setting off, then the borrower should be  given notice about the same with full particulars about the remaining claims.

Guidelines Loan Collection or Recovery

The following guidelines must be followed by all banks and financial institutions during loan collection or recover process:

• In case of a decision to recall or accelerate payment or performance under the agreement or seeking additional securities, notice should be given to the borrower, as specified in the loan agreement or a reasonable period.
• Banks or financial institution should not resort to undue harassment viz. persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans.

In case of any deviation from the fair practices code set by the RBI, you can consult a Chartered Accountant or Lawyer for action that could be taken.