In the absence of Lenders' Liability law, the Reserve Bank, with a view to counter-balance lenders' power under the Securitization Act, has recently finalized its Guidelines on Fair Practices Code for Lenders. The Code aims to usher in greater transparency in financial dealings, the hallmark of most developed financial markets, by requiring financial and banking institutions to follow a number of guidelines.
- Consortium lenders must evolve procedures for the timely appraisal of proposals and for communicating their decisions to borrowers.
- Banks must make proper assessments of credit applications, and are prohibited from using margin and security stipulations as a substitute for due diligence on the creditworthiness of borrowers.
- Terms and conditions and other caveats governing credit facilities must be in writing, and loan agreements must clearly stipulate credit facilities including: the approval or disallowance of facilities such as drawings beyond sanctioned limits, honouring cheques issued for purposes other than agreed, or disallowing drawings due to either the borrower's account being classified as a non-performing asset or its failure to comply with the terms of a loan.
- Loan applications must be verified within a reasonable time with changes in their terms and conditions including interest rates to be notified prospectively.
- Banks must ensure timely disbursement of loans and engage in constructive post-disbursement supervision.
- Borrowers must be given reasonable notice prior to the recall or acceleration of payment or performance under an agreement or before a bank seeks additional security.
- All securities must be released upon payment or realization of a loan, and claims for set off must be exercised in a transparent manner with full particulars of the claim and documents under which this right is exercised being disclosed.
- Lenders' must not interfere in the affairs of borrowers and they are prohibited from resorting to undue harassment to recover loans.
- Requests for the transfer of a borrower's account, either from the borrower or from another institution, must be dealt with within 21 days of receipt.
- Lenders are to frame the Fair Practices Code for all future lending and set up a mechanism to resolve disputes arising in this regard.
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