An essential within any economy, the financial systems advance the channel for capital access while helping individuals and businesses fulfil their financial aspirations. However, some dangers often lie ahead, especially among borrowers where unfair treatment arises from lenders. To help promote fair, transparent and ethical lending practices, the RBI produced a Fair Practices Code (FPC) for lenders. The Fair Practices Code sets a base level of standards for Financial Institutions to adhere to and helps to protect borrowers against unreasonable behaviours. While supporting ethical behaviours, better transparency and borrower protection in the lending arrangements.

Fair Practices Code (FPC) – Defined

The Fair Practices Code (FPC) is a set of guidelines and standards that financial institutions (such as banks and non-banking financial companies) should adopt, in order to promote fairness, transparency and borrower protection in all of their dealings with customers, while providing credit. The codes are meant to create best practices, enhance service quality, and ensure fair treatment of customers.

The Fair Practices Code (FPC) for lenders was introduced by the Reserve Bank of India through a circular dated May 5, 2003 (DBOD. Leg. No. BC. 104 /09.07.007/2002-03) and instructed banks and financial institutions to follow these guidelines after approval from their respective Boards of Directors. These guidelines aimed at borrower protection, have been completed with the recommendations of the Working Group on Lenders’ Liability Laws formed by the Government of India, and in consultation with stakeholders. 

Evolution Of The Fair Practices Code (FPC) And Its Effect On Borrower Protection

The Fair Practices Code (FPC) of the Reserve Bank of India, above, was introduced in 2003, and in the intervening 20 years has evolved considerably to become a broad term for the fair practices code regulatory framework designed to balance borrower protection and access to credit. This framework formed the basis for a series of later circulars from 2006 to 2024, steadily expanding the application of the Fair Practices Code (FPC)—nearly all of them mentioned herein. In 2006, RBI provided DNBS(PD)CC No.80/03.10.042/2005-06, broadening the application of the Fair Practices Code (FPC) to Non-Banking Financial Companies (NBFCs), so that these organizations followed the same ethical lending standards as banks. Later in the same year, the NHB also published guidelines for all Fair Practices Code (FPCs) for HFCs in an effort to ensure consistency and uniformity across different sectors of the financial system.

Now the RBI has been expanding its coverage since 2007, but it has also examined significant issues including high interest rates, repossession, and fees disclosure. These were all important moves in creating a fairer credit environment, in which borrower protection was the primary motive. They were provided with more transparent information and fairer treatment. In 2011 and 2015, the RBI issued Master Circulars, integrating these previous circulars for compliance ease, making the regulatory system easier for financial institutions to understand and ensuring the same application of the FPC.

As borrower rights concerns and grievance mechanisms increased, the RBI pushed further in 2012-2013 through efforts to shore up grievance redressal systems and instill stronger customer service guidelines. Among the several important updates, the 2013 Recovery Agent Code of Conduct (DNBS(PD)CC No.300) became a notable achievement, requiring recovery agents to maintain proper identification documents and receive training, discouraging harassment and malpractices of debt recovery. All these have paved the way for better borrower protection over the years. 

In 2014, the RBI took a major step toward transparency by requiring loan sanction letters to be issued in vernacular languages, allowing for total comprehension of terms even by unbanked population largely from small towns/villages. Thus enhancing rural borrower protection. This was part of a suite of initiatives to remove language barriers that could lead to confusion and/or exploitation. As the years progressed, so did the agenda of the RBI, with the most striking circulars happening in 2015 on fees regarding processing, prepayment charges, and borrower protection from hidden charges. As online lending models have developed quickly in recent years, the RBI eventually needed to address the risks associated with these newer technologies. It issued advisories relating to digital lending in 2018 and implemented detailed Digital Lending Guidelines (Circular: DOR.CRE.REC.66/21.07.001/2022-23) in 2022 by applying Fair Practices Code (FPC) principles to app-based lenders as well as fintech lenders in 2022. These regulations brought in disciplines that protect borrowers, like mandatory APR disclosure, prior consent of the borrower for sharing his data, direct disbursement to the account of the borrower, etc.—helping ensure the fast growth in digital lending would not come at the cost of ethical standards.

In 2021, the RBI took another “giant leap,” towards borrower protection by launching the Integrated Ombudsman Scheme, which brought various avenues of grievance mechanisms into one channel, and it made it much easier for borrowers to file complaints against banks, NBFCs, and digital lenders. Most recently, in 2024 (Circular: RBI/2024-25/30), the RBI continued its focus on borrower protection, by tackling interest charging practices with a keen eye on informed consent and transparency in the entire lifecycle of the loan. This was part of a broader effort to ensure that not only traditional lending practices but also digital lending platforms, adhered to the ethos of fairness and accountability. By constantly introducing changes and modifications, the Fair Practices Code (FPC) was not just able to survive the changing face of finance, but also open new avenues to an inclusive, open, and honest lending market. From banks in the good old days to modern fintech applications, the Fair Practices Code (FPC) is still an indispensable benchmark for lenders to ensure that their borrowers, and especially the borrowers from vulnerable sections of society, are treated with decency, dignity, and honesty. In retrospect, this project – from the 2003 original guidelines to the 2024 digital lending updates, is a testament to the RBI’s commitment towards encouraging trust, fairness and borrower protection.

Key Elements Of Fair Practices Code (FPC)

The following are the key elements of the Fair Practices Code (FPC) based on the Reserve Bank of India’s circular dated May 5, 2003 (DBOD. Leg. No. BC. 104/09.07.007/2002-03):

Applications for Loans and Their Processing

(a) Loan application forms for priority sector advances up to ₹2 lakhs must be detailed. They should mention processing fees, refund rules if the application is rejected, pre-payment terms, and other borrower-impacting information for easy comparison.

(b) Banks must give acknowledgment receipts for every loan application and specify clearly the time frame for the decision, particularly for loans of up to ₹2 lakhs.

(c) Loan applications should be checked quickly. Borrowers should be notified promptly if further documents are required, protecting borrowers from the most crucial element in any loan application – delays.

(d) To ensure transparency, in case a small borrower’s loan (up to ₹2 lakhs) is declined, the bank should inform the specific reasons for non approval of loans, in writing, within a specified time.

Loan Appraisal and Terms/Conditions

(a) Creditworthiness should be evaluated appropriately. Lenders should not employ collateral or margins as substitutes for proper evaluation.

(b) To ensure borrower protection, the bank must inform the borrowers about the credit limit, tenure and all related terms. The borrower’s acceptance should be documented with full knowledge.

(c) All loan terms and caveats must be in writing, certified by an authorized officer. Borrowers must get a copy of the loan agreement and all referenced documents for their reference.

(d) Loan agreements should specify which facilities are at the lender’s discretion (e.g., allowing overdrafts, cheque clearance, or denying further drawdowns after default or NPA classification). No lender is required to extend additional credit until limits are reviewed.

(e) For syndicated (consortium) lending, lenders in the consortium must attempt a joint appraisal of proposals based on mutually agreed timelines, and ultimately share their commercial decision to lend or not, in accordance with agreed timelines.

Disbursement of Loans (with amendments to Terms and Conditions)

Lenders must disburse sanctioned loans on time according to terms of sanction. Any amendments to terms of loan, such as interest rates and changes in charges, must be provided to the borrower in advance and apply only to the future (not retroactive).

Post Disbursement Supervision

(a) Post-disbursement supervision, especially for loans up to ₹2 lakhs, should be helpful and aimed at resolving any lender-related genuine difficulties faced by the borrower.

(b) In order to keep the borrowers protected, the FPC states that before recalling the loan, accelerating payment, or demanding more security, the lender should provide advance notice. This notice should be as per the loan agreement or within a reasonable time if not mentioned in the agreement.

(c) Once the loan is repaid, lenders should release all securities unless they have other valid claims. If any right of set-off is exercised, the borrower must be notified with full details and supporting documents until claims are cleared.

General Guidelines

(a) Lenders must avoid interfering in borrowers’ affairs except as permitted under the loan terms or if new, undisclosed information comes to light.

(b) No discrimination should occur based on gender, caste, or religion. However, participation in government schemes for weaker sections is allowed.

(c) Loan recovery methods have to be ethical. Borrower protection under FPC warrants that the borrower must not be harassed, e.g., calling at strange times or the use of force.

(d) When a borrower or any other financial institution makes a request for transferring the loan account, the lender has to give consent or opposition within 21 days of the receipt of such a request.

Implementation Timeline and Flexibility

Banks and financial institutions are required to adopt the Fair Practices Code for all future lending by August 1, 2003. Though they can modify and extend guidelines to suit, they cannot weaken the underlying principles. Boards should draw up a clear policy on this.

Grievance Redressal Mechanism

Boards must establish an in-house grievance redressal system for resolving grievances relating to loans. All such grievances would be addressed at least up to the next higher authority for disposal. Boards are also needed to review, from time to time, both compliance with the Code and operation of the grievance redressal system and submit a composite review report from time to time.

Operational Steps and Public Disclosure

The Code should be adopted, loan application forms printed, and distributed to all branches/offices by the end of June 2003. The Fair Practices Code (FPC) should be prominently displayed on the institution’s website and widely publicized. A copy is also to be sent to the Reserve Bank of India.

Purpose Of The Fair Practices Code (FPC)

Uniform Standards for Lenders to Be Established

A consistent set of principles is laid down for banks and NBFCs, so that arbitrary practices can be minimized and clients are treated uniformly across institutions.

Ethical Conduct in Lending to Be Promoted

Ethical decision-making is encouraged, and coercive or predatory tactics are discouraged through clearly defined expectations.

Institutional Integrity and Credibility to Be Reinforced

A strong benchmark for ethical conduct is created, helping credibility to be built with borrowers, regulators, and the financial ecosystem at large.

Regulatory Oversight and Compliance to Be Strengthened

Institutions are guided to comply with RBI regulations, and a mechanism is provided for holding them accountable in case of violations.

Long-Term Financial Stability to Be Supported

Responsible lending practices and effective risk assessments are promoted and ensure the ongoing stability of the overall credit system.

A Transparent and Inclusive Credit Culture to Be Encouraged

An environment is created where transparency, fairness, and accessibility in lending are promoted—especially for underrepresented or first-time borrowers.

How are Borrowers Protected From The Fair Practices Code (FPC)

Encourage Responsible Lending

The guidelines ask lenders to assess contact with the borrower in relation to the borrower’s overall creditworthiness rather than merely relying on collateral or margin. These principles limit the risk exposure of over-lending, over-reliance on collateral, or lending to people who may not be economically in a position to repay.

Borrower Protection from Hidden Fees

Borrowers benefit from the Fair Practices Code (FPC) guidelines which require that fees, penalties, and charges be transparent so that borrowers are protected from any hidden or unexpected costs.

Creation of Transparency

The Fair Practices Code (FPC) ensures that all terms and conditions related to loans are clearly stated, and borrowers are protected from any surprise fees or changes in terms and conditions after loan approval.

Borrower Protection from Non-Clarity on Loan Disbursement Conditions

Borrowers can rely on the loan being disbursed under the conditions agreed upon. The Fair Practices Code (FPC) ensures that once approved, there will be no hidden costs or fees that the client was not informed of.

Build Customer Trust

The Fair Practices Code (FPC) builds trust between borrowers and lenders through a transparent and equitable lending process. Ultimately, a trustworthy standard process leads to longer customer contact and a relationship. The Fair Practices Code (FPC) guarantees that loans are approved or refused based on objective criteria, and anyone rejected or refused is entitled to clear reasons and justifications.

Creation of a Level Playing Field

The Fair Practices Code (FPC) allows for borrower protection and equal treatment of all customers. This means that lenders do not discriminate against borrowers based on gender, faith, religion, or state of origin. In addition, the Fair Practices Code (FPC) promotes established processes for underwriting and risk decision-making to lessen bias when lenders follow FPC guidelines.

Borrower Protection from Unfair Debt Recovery Practices

The procedural provisions within the Fair Practices Code (FPC) promote fair treatment with borrowers and clients knowing they will not become a victim of questionable or offensive practices. All debt recovery must be reasonably followed.

Borrower Protection Through Grievance Redressal Options

If things go wrong in the lending process, the borrower can file a grievance with the bank’s internal mechanism, which gives borrowers a chance to have their issues resolved.

Release of ‘Charge on Collaterals’ in a Timely Manner

Once a loan is fully paid, the borrower should expect their security or collateral (if any) to be satisfied/released in a timely manner. Freeing the collateral of any charge is an important step towards borrower protection. 

Borrower Protection Through Empowerment and Financial Literacy

The Fair Practices Code (FPC) provides clear wording and information to help borrowers develop a better understanding of their obligations, and how to meet those obligations. It also states the rights of the borrower and responsibilities of the lender so as to enable a smooth loan process.

Conclusion

The Fair Practices Code (FPC) created by the RBI helps in ensuring that financial institutions follow ethical practices and create a safer lending environment for borrowers. The rights and interests of clients get promoted by Fair Practices Code (FPC) through defined and clear communication, borrower protection from predatory practices and access to equitable redress. This helps support a better, clearer, and more responsible financial ecosystem in India. To know more about the RBI fair practice code you may read here. SME borrowers and Business Entities may contact experts like BankKeeping to be able to manage their business loan better. and