Loan application, processing and disbursement

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Lending is the main business activity of banks and NBFCs. Credit institutions adopt different means and strategies to attract borrowers.

In order to protect the rights of the borrower, the RBI has drawn up “Guidelines on Code of Fair Practice for Lenders”, which these credit institutions must follow. These guidelines are intended to protect the rights of borrowers.

These guidelines have been developed by RBI based on the recommendations of the Task Forces on Lender Liability Laws, set up by the Government of India. These guidelines are categorized under five headings covering different aspects of the lending process.

Loan application and processing

The loan application must be complete and must include details such as fees and charges, fee refunds, prepayment and any other matters that affect the borrower’s interest, so that a meaningful comparison with that of other lenders can be made and an informed decision can be made by the borrower.

An acknowledgment of receipt of all loan applications as well as a time frame for disposal must be provided by lenders.

Verification of the loan to be done within a reasonable time. Additional documents to be requested immediately. In the event of refusal of a loan, applicants must be informed in writing of the reasons for the refusal within the time allowed.

Loan assessment / terms and conditions

Lenders must ensure that there is proper assessment of borrowers’ credit application. They should not use the margin and security stipulation as a substitute for due diligence on the borrower’s creditworthiness.

Lenders must convey the credit limit along with the terms and conditions to the borrower and take the borrower’s acceptance after fully understanding the terms and conditions.

Where possible, the loan agreement should clearly stipulate credit facilities which are at the sole discretion of the lenders.

All terms and conditions between the borrower and the lender should be in writing with the signature of authorized persons. This should be provided to the borrower along with a copy of the agreement.

Loan disbursement

Lenders must guarantee the timely disbursement of loans in accordance with the agreed terms and conditions.

In the event of changes to the terms and conditions such as interest rate, bank charges, etc., notice must be provided to the client. Each of these changes should be made prospectively only.

Post-disbursement supervision

A constructive approach must be adopted by lenders to manage the difficulties that the borrower may face. Advance notice must be provided to the borrower in the event of a loan repayment reminder/acceleration by the lender.

All securities must be released once the loan is paid or realised. Advance notice must be provided to the borrower in the event of the initiation of compensation.

Terms of Service

Lenders must refrain from borrower business beyond what is mentioned in the terms and conditions unless there is new information not disclosed by the borrower earlier.

No discrimination based on caste, religion, gender, etc. Loans made under credit link programs to the weaker part of society are an exception.

Lenders should not resort to undue harassment of borrowers in loan collection, such as constantly disturbing borrowers at odd hours, using muscle force for loan collection, etc. Any transfer request from the Borrower or any bank/financial institution must be answered within 21 days.

The board of lenders should establish the appropriate grievance mechanism within the organization to resolve disputes arising in this regard.

(The writer is a social activist based on Vile Parle)

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