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Fair code for banks by April

Mumbai, Dec. 19: The Reserve Bank of India (RBI) today came out with draft guidelines on the “Fair Practices Code on Lenders Liability” to be followed by commercial banks and financial institutions, emphasising on transparency and proper assessment of borrowers’ credit requirements.

RBI said the adoption of the code should be completed by the end of March. The code follows the recommendations of the working group on lenders liability constituted by the government.

Under the broad guidelines, RBI said loan application forms issued by banks or FIs should include information about rate of interest (fixed/floating) and manner of charging (monthly/quarterly/half-yearly/yearly), process fees and other charges, penal interest rates, pre-payment options and any other matter which affects the borrower’s interest, so that a meaningful comparison with other banks can be made and informed decision can be taken by the borrower.

While banks have also been asked to devise a system of acknowledging receipt of all loan applications, the RBI said they should verify loan applications within a reasonable period of time. “If all requirements are complied with by borrowers, banks/financial institutions should acknowledge 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,” RBI stated.

The 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 loan application.

In the case of rejection of any loan application, lenders should convey in writing the specific reasons therefore. Further, lenders should ensure that credit requirement of borrowers is properly assessed. The credit limit, which may be sanctioned, should be mutually settled.

Terms and conditions and other caveats governing credit facilities given by banks arrived after negotiations 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 an agreement should be made available to the borrowers for their record.

While lenders should also 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 among others,” RBI noted.

According to the RBI, the loan agreement should clearly specify the liability of lenders to borrowers in regard to allowing drawings beyond the sanctioned 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.

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