The Reserve Bank of India (RBI) requires all scheduled commercial banks and Non-Banking Financial Companies (NBFCs) to follow a Fair Practices Code (FPC). Most borrowers are unaware of it — and lenders count on that. Knowing these rules is your first line of defence.
What Is the Fair Practices Code?
The RBI's Fair Practices Code is a set of guidelines (most recently updated via RBI circular RBI/2023-24) that governs how lenders must treat borrowers at every stage: application, sanction, disbursement, and recovery. It applies to all banks, housing finance companies, and registered NBFCs.
Your Rights at the Application Stage
- Lenders must provide a loan application acknowledgement with a reference number.
- They must convey in writing the reasons for rejection — you have the right to know why.
- All loan products must be explained in the language you understand.
- No lender may discriminate on grounds of gender, caste, religion, or disability.
Key Annual Percentage Rate (APR) Disclosure Rules
Banks must disclose the annualised rate of interest (effectively the APR) in the sanction letter. This means the rate must include all compulsory charges. If a lender only mentions a "flat rate", ask for the reducing balance rate and the APR — it is your legal right.
RBI Rule: Lenders must communicate the all-inclusive annual interest rate to you in the sanction letter and the loan agreement, in a standardised format.
Prepayment and Foreclosure Rights
As per RBI guidelines effective from 2012 onwards:
- Banks cannot charge foreclosure or prepayment penalties on floating-rate loans to individual borrowers.
- This applies to home loans, personal loans, and auto loans on floating rates.
- Fixed-rate loans may carry a prepayment charge, but it must be disclosed upfront.
Recovery and Collection Practices
The RBI strictly regulates debt collection. Lenders and their recovery agents are prohibited from:
- Contacting borrowers before 8 AM or after 7 PM
- Using intimidating, abusive, or threatening language
- Visiting a borrower's workplace without prior notice
- Disclosing defaulter information to third parties not authorised for credit recovery
The Key Fact Statement (KFS)
From October 2024, the RBI mandates a Key Fact Statement for all retail and MSME loans. The KFS must be provided before loan execution and must list the exact APR, all fees, the repayment schedule, and the grievance redressal contact. You should always request this document.
How to Complain
If a lender violates the Fair Practices Code, you can file a complaint with the RBI Integrated Ombudsman Scheme at cms.rbi.org.in. The scheme is free, and the ombudsman has powers to award compensation of up to ₹20 lakh.