The Reserve Bank of India, on Monday, revamped the fair practices code (FPC) to be adopted by non-banking finance companies (NBFCs) while doing lending business.
The guidelines covered general principles on adequate disclosures on the terms and conditions of a loan and also adopting a non-coercive recovery method.
“A review of the guidelines is made in view of the creation of a new category of NBFCs, NBFC-MFIs and also rapid growth in NBFCs' lending against gold jewellery,” said the RBI.
The RBI said that the modified FPC should be put in place by all NBFCs with the approval of their boards within one month from the date of issue of this circular and should be published and disseminated on the web-site of the company for public information.
However, it said, NBFCs would have the freedom of drafting the FPC, enhancing the scope of the guidelines but in no way sacrificing the spirit underlying the above guidelines.
The RBI said that NBFCs should mention the penal interest charged for late repayment in bold in the loan agreement.
The apex bank said that not furnishing a copy of the loan agreement or enclosures quoted in the loan agreement was an unfair practice and this could lead to disputes between the NBFC and the borrower with regard to the terms and conditions on which the loan was granted.
In loan recovery, the NBFCs should not resort to undue harassment such as persistently bothering the borrowers at odd hours and use of muscle power, said the RBI.
It said that it had been receiving several complaints regarding levying of excessive interest and charges on certain loans and advances by NBFCs. “Though interest rates are not regulated by the Bank, rates of interest beyond a certain level may be seen to be excessive and can neither be sustainable nor be conforming to normal financial practice.”
Boards of NBFCs are advised to lay appropriate internal principles and procedures in determining interest rates and processing and other charges. The RBI said that the board-approved policy is needed with regard to auction of jewellery in case of non-repayment, which would be transparent, and adequate prior notice to the borrower should be given before the auction date. It should also lay down the auction procedure that would be followed. There should be no conflict of interest and the auction process must ensure that there is arm's length relationship in all transactions during the auction, including with group companies and related entities. The auction should be announced to the public by issue of advertisements in at least 2 newspapers, one in vernacular language and another in national daily newspaper.
As a policy, the RBI said that NBFCs themselves should not participate in the auctions held. Gold pledged will be auctioned only through auctioneers approved by the board.
