Fair Practices Code (FPC) for NBFC- Microfinance Institutions

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Fair Practices Code (FPC) for NBFC- Microfinance Institutions

The RBI has issued a Fair Practice Code (FPC) for NBFC-MFIs to set standards for fair business and practices done in the company while dealing with the customer. The company must follow the FPC recommended by RBI to comply with the standards.

Micro Finance institutions provide financial services to those people who don’t have access to banks and big finance institutes. Their primary market is low-income individuals in rural or urban areas. RBI has set the rules so that the NBFC-MFIs will resolve any disputes or differences with customers in a straightforward way.  

Different Fair Practice Codes of NBFC-MFIs

The NBFC-MFIs have to follow the fair practice codes, set by RBI to guarantee the fair treatment of customers and safeguard their interests. Below are the FPCs which give NBFC a structure to follow:

Loan Application and Processing

• The loan products should be the same as mentioned in the policy of the company.
• The communication should be in Vernacular language or a language that is understood by all the borrowers.
• The necessary information should be included in the application for a loan. The terms and conditions should be in the interest of the borrower. Along with this, the documents that need to be submitted with the application must be included.

Loan Appraisal and Terms/Conditions 

• The communication shall be in English or Vernacular language. In case of sanction of loan or letter must contain the amount of loan sanctioned with all the terms and conditions including annualized rate of interest and method of applications. 
• All the pricing-related information including fees must be added to a standardized simplified factsheet.
• The acceptance of terms and conditions must be communicated with the borrower and shall be written in a record and a copy of the same must be provided to the borrower upon request.
• Must mention the penal interest charged for late repayment in bold and the sanction letter and agreement. There should be no pre-payment penalties on microfinance loans. If any penalty will be charged then it should be on the overdue amount not on the entire loan amount.

Disbursement of Loans Including Changes in Terms and Conditions

• The terms and conditions such as disbursement schedule, interest rates, service charge, etc will be written in the vernacular language. Any change in the interest rate and charge must be effective and suitable conditions in this regard must be incorporated in the loan agreement.
• The decision to recall payment or performance under the agreement must be suitable with the loan agreement. 

General Fair Practices

• The fair practice code should be in the vernacular language in the office or branch premises. Also, understandable language will be used on the loan card which states the commitment to transparency and fair lending practices.
• The staff must be well trained to handle the queries of the customers
•  The field personnel must be trained to make all the necessary inquiries regarding the existing debt of the borrower and the income of the borrower.
• The provided training to the borrowers must be free of cost. The field staff must be trained to provide such services and make the borrower completely aware of the loan procedure and the systems.
• All the minimum, maximum, and average interest rates which are charged by microfinance companies should include in the pamphlets, information booklets, company website, and office premises.
• The MFI will be responsible for inappropriate staff behavior or other outsourced agency.
• The RBI guidelines must be followed to check the repayment capacity and due diligence of the borrower.
•  As per the NBFC-MFI 2011, all the loan sanctions and disbursement should be carried out in one central location. The loan disbursement function should be closely followed.
• The appropriate measures should be taken to check that the process is straightforward and the loan disbursement is complete within the allocated time period.

Disclosures in Loan Agreement/ Loan Card

• Must have a board-approved standard format for loan agreement and this agreement should be in Vernacular language.
• The following must be disclosed in the loan agreement:
• All the terms and conditions of the loan
• The pricing of the loan involves three components; interest charge, processing charge, and insurance premium. 
• There will be no penalty on the delayed payment
• No Security Deposit/ Margin is collected from the borrower.
• The borrower cannot be a member of more than one SHG/JLG.
• The data of the borrower will keep private.
• The Loan Card must show these details as per the RBI Regulatory Framework for Microfinance Loans Directions 2022:
• Information that identifies the borrower.
• Simple factsheet of pricing
• All the conditions which are attached to the loan
• Acknowledgments of all repayments including installments received and the final discharge.
• Grievance Redressal System details including name and contact number of the nodal officer.

All the entities must be in the language which is understood by the borrower. For non-credit products, the full consent of the borrower and fee structure will be stated in the loan card.

Conclusion

A fair code of conduct must be followed by the NBFC-MFIs while dealing with clients. The FPC provides an NBFC a structure to follow the framework which guarantees the fair treatment of customers and their interests. It encourages the efficient grievance procedure and creates trust. 

At Registrationwala, we can assist you with the NBFC license registration for your business by providing you with the following services:

• Document drafting.
• Application filing & its successful submission.
• Conducting follow-ups and dealing with discrepancies during the application assessment.
• Delivering the NBFC registration license to you.

So, connect with us if you want NBFC Registration for your company in a timely and cost-effective manner.

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