Fair lending code: The Reserve Bank of India vide its Master Circular No. RBI/2010-11/25 DNBS (PD) CC No.185/03.10.042 /2010 -11 dated July 1, 2010 laid down Guidelines on Fair Practices Code for NBFCs. The relevant extracts from the Circular as regard the loans by NBFCs are furnished below:
(i) Applications for loans and their processing
(a) Loan application forms should include necessary information which affects the interest of the borrower, so that a meaningful comparison with the terms and conditions offered by other NBFCs can be made and informed decision can be taken by the borrower. The loan application form may indicate the documents required to be submitted with the application form.
(b) The NBFCs should devise a system of giving acknowledgement for receipt of all loan applications. Preferably, the time frame within which loan applications will be disposed of should also be indicated in the acknowledgement.
(ii) Loan appraisal and terms/conditions
The NBFCs should convey in writing to the borrower by means of sanction letter or otherwise, the amount of loan sanctioned along with the terms and conditions including annualised rate of interest and method of application thereof and keep the acceptance of these terms and conditions by the borrower on its record.
It is understood that in a few cases, borrowers at the time of sanction of loans are not fully aware of the terms and conditions of the loans including rate of interest, either because the NBFC does not provide details of the same or the borrower has no time to look into detailed agreement.
Accordingly, it was advised that not furnishing a copy of the loan agreement or enclosures quoted in the loan agreement is an unfair practice and this could lead to disputes between the NBFC and the borrower with regard to the terms and conditions on which the loan is granted.
NBFCs are, therefore, advised to invariably furnish a copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement to all the borrowers at the time of sanction / disbursement of loans.
(iii) Disbursement of loans including changes in terms and conditions
(a) The NBFCs should give notice to the borrower of any change in the terms and conditions including disbursement schedule, interest rates, service charges, prepayment charges etc. NBFCs should also ensure that changes in interest rates and charges are effected only prospectively. A suitable condition in this regard should be incorporated in the loan agreement.
(b) Decision to recall / accelerate payment or performance under the agreement should be in consonance with the loan agreement.
(c) NBFCs should release all securities on repayment of all dues or on realisation of the outstanding amount of loan subject to any legitimate right or lien for any other claim NBFCs may have against borrower. If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining
claims and the conditions under which NBFCs are entitled to retain the securities till the relevant claim is settled/paid.
(a) NBFCs should refrain from interference in the affairs of the borrower except for the purposes provided in the terms and conditions of the loan agreement (unless new information, not earlier disclosed by the borrower, has come to the notice of the lender).
(b) In case of receipt of request from the borrower for transfer of borrowal account, the consent or otherwise i.e. objection of the NBFC, if any, should be conveyed within 21 days from the date of receipt of request. Such transfer shall be as per transparent contractual terms in consonance with law.
(c) In the matter of recovery of loans, the NBFCs should not resort to undue harassment viz. persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, etc.
(v) The Board of Directors of NBFCs 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 lending institutions’ functionaries 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 management. A consolidated report of such reviews may be submitted to the Board at regular intervals, as may be prescribed by it.
(vi) Fair Practices Code based on the guidelines outlined hereinabove should be put in place by all NBFCs with the approval of their Boards within one month from the date of issue of this circular. NBFCs 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. The same should be put up on their web-site, if any, for the information of various stakeholders.
• KYC norms
The ‘Know Your Customer’ guidelines were issued in February 2005 revisiting the earlier guidelines issued in January 2004 in the context of the Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). These standards have become the international benchmark for framing Anti Money Laundering and combating financing of terrorism policies by the regulatory authorities. Compliance with these standards by the banks/financial institutions/NBFCs in the country have become necessary for international financial relationships. See: Master Circular No. 184 dated July 01, 2010.
With reference to the said Master Circular referred to above on Know Your Customer (KYC) norms /Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT) Obligation of NBFCs under PMLA,2002, the Reserve Bank of India recently vide its Circular No. RBI/2010-11/419 DNBS. (PD) CC No 212 /03.10.42/2010-11 dated 8th March, 2011 made certain modifications in terms of which:
?NBFCs are required to apply enhanced due diligence measures on high risk customers. Some illustrative examples of customers requiring higher due diligence have also been given in the paragraph under reference. NBFCs have been further advised that in view of the risks involved in cash intensive businesses, accounts of bullion dealers(including sub-dealers) and jewelers should also be categorized by NBFCs as ‘high risk’ requiring enhanced due diligence.
It is advised that NBFCs are also required to subject these ‘high risk accounts’ to intensified transaction monitoring. High risk associated with such accounts should be taken into account by NBFCs to identify suspicious transactions for filing Suspicious Transaction Reports (STRs) to FIU-ND.
Anti money laundering responsibilities –
In terms of the Master Circular No. 184 dated July 01, 2010 on Know Your Customer (KYC) norms /Anti-Money Laundering (AML) standards, certain responsibilities have been cast upon NBFCs and persons authorised by NBFCs including brokers/agents etc. to adhere to the Anti Money Laundering Standards.
With reference to the said Master Circular referred to above on Know Your Customer (KYC) norms /Anti-Money Laundering (AML) standards, the Reserve Bank of India recently vide its Circular No. RBI/20010 -11/162 DNBS. (PD) CC No 192 /03.10.42/2010-11 dated August 09 , 2010 made certain modifications in terms of which:
Suspicion of money laundering/terrorist financing
With a view to preventing NBFCs from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing, it is clarified that whenever there is suspicion of money laundering or terrorist financing or when other factors give rise to a belief that the customer does not, in fact, pose a low risk, NBFCs should carry out full scale customer due diligence (CDD) before opening an account.
Filing of Suspicious Transaction Report (STR)
NBFC should not open an account (or should consider closing an existing account) when it is unable to apply appropriate CDD measures. It is clarified that in the circumstances when a NBFC believes that it would no longer be satisfied that it knows the true identity of the account holder, the Company should also file an STR with FIU-IND.
Politically Exposed Persons (PEPs)
In the event of an existing customer or the beneficial owner of an existing account, subsequently becoming a PEP, NBFCs (including RNBCS) should obtain senior management approval to continue the business relationship and subject the account to the CDD measures as applicable to the customers of PEP category including enhanced monitoring on an ongoing basis. It is further clarified that the instructions are also applicable to accounts where PEP is the ultimate beneficial owner. Further, in regard to PEP accounts, it is reiterated that NBFCs should have appropriate ongoing risk management procedures for identifying and applying enhanced CDD to PEPs, customers who are close relatives of PEPs, and accounts of which PEP is the ultimate beneficial owner.
The role and responsibilities of the Principal Officer should include overseeing and ensuring overall compliance with regulatory guidelines on KYC/AML/CFT issued from time to time and obligations under the Prevention of Money Laundering Act, 2002, rules and regulations made thereunder, as amended form time to time.
There has been an amendment to Prevention of Money Laundering (Maintenance of Records of the Nature and Value of Transactions, Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Amendment Rules, 2010, in respect of certain obligations to be followed by NBFCsand RNBCs.
The crux of the amendments is as follows:
Transaction involving financing of activities related to
- => Terrorism
- => Involves funds suspected or to be related to
- => To be used for terrorism, terrorist act
- => Or those who are attempting to financing of terrorism “Records of the identity of clients” shall include records of the identification data Account files and Business correspondence “Cessation of the transaction” means termination of an account or business relationship
- => Every banking company, financial institution and intermediary to determine
- => If client acting on behalf of beneficial owner To identify beneficial owner
- => Take reasonable steps to verify his identity
- => Every banking company, financial institution and intermediary to exercise Ongoing due diligence
- => Examine the transactions to ensure their consistency with the knowledge of their client, business and risk profile
- => No banking company, financial institution and intermediary to allow Opening or keep any anonymous account
- => Open or keep account in fictitious names
- => Open or keep account on behalf of persons whose identity is undisclosed or not verified
Ozg NBFC Consultant
Ozg Center, New Delhi & Mumbai
Phone # 09811415831-37-61-72-84-92-94