Fair Practices Code on Lender's Liability

Introduction

RBI introduced the Fair Practices Code in 2003 to protect bank loan borrowers.

• The code aims to ensure ethical practices by banks and financial institutions.
• Guidelines were finalized and adopted by banks, with the freedom to enhance them while preserving the spirit.
• The code is a framework to prevent unfair lending practices and hold institutions accountable.

---

To Whom Applicable

• Guidelines apply to all borrowers, excluding:
  • Staff loans
  • Loans against specific securities

Applicable Customer Types:

• Individuals

• Joint Borrowers

• Proprietary concerns

• Partnership firms

• Private and Public Ltd. Companies

• Trusts

• PSUs

• Covers both fund-based and non-fund-based limits for all mentioned borrower categories.

---

Practices to be Adopted

1. Provide prospective borrowers with general information on interest rates, processing fees, charges, penal rates, and other relevant details.
2. Priority sector borrowers receive this information in the application form itself.
3. Acknowledge filled application forms and specify the time frame for conveying loan decisions after receiving all required details.
4. Discuss rules, terms, conditions, margins, security, interest rates, service charges, etc., with borrowers.
5. Address queries arising from due diligence within 10 working days of application receipt.

---

Loan Assessment

• Ensure clients meet eligibility criteria based on applicable norms for their category.
• In retail banking, consider factors like age, income, employment status, and qualifications.
• Assess applications within a reasonable time frame, announcing the timeframe and discussing additional details with clients when needed.
• Proposals should be put up for sanction and communicated within the stipulated time according to bank guidelines.
• The applications will be assessed objectively. RBI has laid down methods of arriving at the need-based requirements of various sections of the borrowers covered in various communications on different subjects. The said methods/procedures, as may be amended from time to time, shall be followed by the bank.
• While assessing the credit needs of the proponents/borrowers, stipulation of margin, security etc. will be based on the guidelines governing the schemes/facilities as approved by the Board of Directors. The collateral security and the margin will be regarded only as an additional comfort for the lender and will not be the sole criteria for deciding a loan request.
• Wherever the applications are rejected, the same should be conveyed in writing. The specific reason for rejection will be indicated in case of all advances including those up to ₹2 lakhs, depending upon the actual reason, but within the timeframe stipulated so that the applicant may be free to go to another institution to raise the loan.

---

Time Stipulations for Considering Credit Requests

Priority Sector

Loan Amount	SME Units	Agriculture & Other Priority Sector
Up to ₹25,000	15 days	15 days
Up to ₹5 lakhs	4 weeks	8/9 weeks
Above ₹5 lakhs	8 weeks	—

C & IC Sector

Request Type	Exporters	Others
Fresh / Additional	45 days	45 days
Adhoc	15 days	20 days

---

Loan Disbursement

• Issue a sanction letter with terms, conditions, and covenants upon loan approval. The sanction letter should be issued by an authorized signatory — Credit Department Head or Branch Manager.
• Clearly outline discretionary guidelines for overdrawing, honoring cheques, cash withdrawals, business growth, non-performing assets, and compliance.
• Disburse loans promptly upon compliance with sanction terms.
• Provide copies of executed documents to borrowers upon request, subject to applicable charges.
• Advise customers on products like FEX derivatives and swaps, emphasizing their responsibility for informed decisions.
• Respond to requests for 'No dues certificate' or transfer of a borrowal account within 21 days of receipt.

---

Loan Administration

• Keep borrowers informed of account status through periodic statements.
• Notify borrowers in advance (7 working days) of any changes in terms, conditions, interest rates, or service charges, either on the website or through press notification.
• Obtain necessary information from borrowers for monitoring their account conduct during the facility tenure.
• Provide reasonable time for submission of required information and address genuine difficulties or unplanned situations.
• Specify different time limits for information submission in the sanction letter.
• Reserve the right to enforce security for dues recovery in case of default or non-adherence to terms, following normal procedures.
• Refrain from interfering in borrower affairs, except as specified in the terms and conditions, unless new undisclosed information comes to the bank's knowledge.

---

Recall / Repayment of the Loan

• Communicate any decision to recall the loan or accelerate payment to borrowers in advance, providing a 15-day notice period.
• Initiate further recovery steps only after the expiration of the notice period, unless warranted by a change in circumstances.
• Release all securities upon full repayment of the loan and clearance of dues by the borrower.
• Retain a legitimate right of lien for any other claims the bank may have against the borrower.
• Notify borrowers of outstanding claims, providing full particulars, and retain securities until relevant claims are settled or paid.

---

Grievance Redressal Mechanism

• Bank has established a procedure for grievance redressal.
• Ensures review and disposal of disputes arising from decisions at the next higher level.
• Board reviews matters through periodic reports.
• Borrowers receive a copy of the charter for grievances, prominently displayed in branch premises.

---

Conclusion

• Fair Practices Code summarizes existing guidelines with necessary improvements in line with RBI directives.
• Ensures the bank acts in good faith and without negligence in dealings with borrowers.
• Detailed operational guidelines, as amended, will continue to govern specific areas.
• Banks, having adopted the code, should advise borrowers on specific time limits and code of conduct.
• Emphasizes meticulous implementation of the guidelines for ethical and responsible banking.

---

Summary Cheat Sheet

Parameter	Detail
Introduced	2003 by RBI
Purpose	Prevent unfair lending, ensure ethical practices
Applicability	All borrowers (excluding staff loans & loans vs specific securities)
Customer Types	Individuals, Joint, Proprietary, Partnership, Pvt/Pub Ltd, Trusts, PSUs
Limits Covered	Both fund-based & non-fund-based
Due Diligence Queries	Within 10 working days
Rejection Communication	In writing (specific reason for advances up to ₹2 lakhs)
Collateral	Additional comfort only, not sole criteria
Assessment	Objective, as per Board-approved guidelines
SME (Up to ₹25K)	15 days
SME (Up to ₹5L)	4 weeks
SME (Above ₹5L)	8 weeks
Agri/Priority (Up to ₹25K)	15 days
Agri/Priority (Above ₹25K)	8/9 weeks
C&IC Fresh/Additional	45 days (Exporters & Others)
C&IC Adhoc (Exporters)	15 days
C&IC Adhoc (Others)	20 days
Sanction Letter Signatory	Credit Dept Head / Branch Manager
No Dues Certificate	Within 21 days of request
Executed Docs Copy	On request, subject to charges
FEX Derivatives	Customer advised to make informed decisions
Change Notification	7 working days advance notice
Loan Recall Notice	15 days advance notice
Security Release	On full repayment & clearance of dues
Right of Lien	Retained for other claims
Grievance Redressal	Procedure established, charter displayed in branches
Board Role	Periodic review of grievance reports

---