Ref.DBOD.No.Leg.BC. /09.07.007 / 2002-03 December 2002 All Scheduled Commercial Banks/All India Financial Institutions
(excluding RRBs and LABs) Dear Sir, Fair Practices Code on Lenders' Liability We advise that on the basis of the recommendations of the Working Group on Lenders’ Liability Laws constituted by the Government of India to study legislative proposals suitable for Indian conditions, we have examined the feasibility of introducing the Fair Practices Code on lenders' liability for the use of banks and Financial Institutions in consultation with select banks and Financial Institutions. We have, now, prepared the following broad guidelines to be adopted by banks and Financial Institutions for framing the Fair Practices Code with the approval of their Boards. 2. Guidelines on Fair Practices Code - Loan Application forms shall be comprehensive to include information about rate of interest (fixed / floating) and manner of charging (monthly / quarterly / half-yearly / yearly rests), process fees and other charges, penal interest rates, pre-payment options and any other matter which affects the interest of the borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower.
- Banks and Financial Institutions should devise a system of giving acknowledgement for receipt of all loan applications. Banks / Financial Institutions should verify the loan applications within a reasonable period of time. If additional details / documents are required, they should intimate the borrowers immediately. If all the requirements are complied with by borrowers, banks / Financial Institutions should acknowledge for the same and state the specific time period from the date of acknowledgement within which a decision on the loan request will be conveyed to the borrowers.
- Acknowledgement should also state the amount of process fees paid or to be paid and the extent to which such fees shall be refunded in the event of rejection of any application for loan.
- In the case of rejection of any loan application, lenders should convey in writing the specific reasons therefor.
- Lenders should ensure that there is proper assessment of credit requirement of borrowers. The credit limit, which may be sanctioned, should be mutually settled.
- Terms and conditions and other caveats governing credit facilities given by banks/ Financial Institutions arrived at after negotiation by the lending institution and the borrower should be reduced in writing duly witnessed and certified by the authorised sanctioning authority; in respect of advances sanctioned by the Board of Directors or its committee the document of understanding should be certified by the authorised signatory preferably at Company Secretary level. A copy of such agreement should be made available to the borrowers for their record.
- Lenders should ensure timely disbursement of loans sanctioned.
- Stipulation of margin and security should be based on due diligence and credit worthiness of borrowers.
- Lenders should keep the borrowers apprised of the state of their accounts from time to time and shall give notice of any change in the terms and conditions including interest rates, service charges etc. Lenders should also ensure that changes in interest rates and charges are effected only prospectively. To ensure the above, Banks / Financial Institutions should create appropriate information dissemination mechanism.
- The loan agreement should clearly specify the liability of lenders to borrowers in regard to allowing drawings beyond the sanctioned limits, honouring the cheques issued for the purpose other than agreed, disallowing large cash withdrawals and obligation to meet further requirements of the borrowers on account of growth in business etc. without proper revision and sanction in credit limits, and disallowing drawings on a borrowal account on its classification as a non- performing asset or on account of non-compliance with the terms of sanction.
- Lenders should give reasonable notice to borrowers before taking decision to recall / accelerate payment or performance under the agreement or seeking additional securities.
- Lenders should release all securities on receiving payment of loan or realisation of loan subject to any legitimate right of lien for any other claim lenders may have against borrowers. If such right of set off is to be exercised, borrowers shall be given notice about the same with full particulars about the remaining claims and the documents under which lenders are entitled to retain the securities till the relevant claims are settled / paid.
3. Banks and Financial Institutions will have the freedom of drafting the Fair Practices Code enhancing the scope of the guidelines but in no way sacrificing the spirit underlying the above guidelines. For this purpose, the Boards of banks and Financial Institutions will also lay down clear policy as regards time frame, reasonableness of parameters indicated in the Fair Practices Code, etc. 4. The Board of Directors should also lay down the appropriate grievance redressal mechanism within the organization to resolve disputes arising in this regard. Such a mechanism should ensure that all disputes arising out of the decisions of a bank’s functionary are heard and disposed of at least at the next higher level. The Board of Directors should also provide for periodical review of the compliance of the Fair Practices Code and the functioning of the grievances redressal mechanism at various levels of controlling offices with a consolidated report of such reviews submitted to the board at regular intervals as prescribed by it for this purpose. 5. Separate instructions would be issued by Reserve Bank of India regarding resolution of disputes between the banks/Financial Institutions and the borrowers remaining unresolved at the banks / Financial Institutions level. 6. Banks and Financial Institutions should take steps to have the ‘Fair Practices Code’ drawn so as to be in place by April 1, 2003. The adoption of the Code, printing of necessary loan application forms and circulation among the branches and controlling offices should also be completed latest by end of March 2003. The Fair Practices Code, which may be adopted by banks and Financial Institutions, should also be put on their website and given wide publicity. A copy may also be forwarded to the Reserve Bank of India. 7. Please acknowledge receipt. Yours faithfully, (M.R. Srinivasan)
Chief General Manager-in-Charge |