The Fair Practices Code: What Your Lender Must Disclose and How It Must Behave When You Default

Most borrowers meet the Fair Practices Code for the first time on the day a recovery call arrives, which on a 5-year loan is roughly three years too late. The Code is a disclosure instrument first and a conduct instrument second, and almost every defence it offers is built out of paper the lender was obliged to hand over at sanction: a sanction letter carrying the annualised rate of interest, a complete copy of the loan agreement with every enclosure named in it, and a rate-and-risk-gradation policy published on the lender's own website.

The Reserve Bank first issued Fair Practices Code guidelines to non-banking financial companies by circular dated 28 September 2006, revised them on 26 March 2012, and consolidated them in the Master Circular - Fair Practices Code (RBI/2015-16/16, DNBR (PD) CC.No.054/03.10.119/2015-16) dated 1 July 2015, addressed to all NBFCs and Residuary Non-Banking Companies. Four later cross-sector circulars have since hardened its disclosure limb: penal charges on 18 August 2023, release of property documents on 13 September 2023, the Key Facts Statement on 15 April 2024, and pre-payment charges on 2 July 2025.

This piece stays on that limb: what a lender must put in writing, when, and what follows if it did not. The conduct rule is a single line of the same 1 July 2015 Master Circular, quoted below.

The Statutory Position

The operative duty sits in paragraph 2A(ii) of the Master Circular - Fair Practices Code dated 1 July 2015. It requires the lender to "convey in writing to the borrower in the vernacular language as understood by 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", to keep the borrower's acceptance on record, and to state penal interest for late repayment in bold in the loan agreement.

The same paragraph closes the second gap. It records that "not furnishing a copy of the loan agreement or enclosures quoted in the loan agreement is an unfair practice", and directs lenders to furnish the agreement plus a copy each of all enclosures quoted in it at sanction or disbursement. An agreement referencing a schedule of charges the borrower has never seen is, on the text of the 2015 circular, a defective disclosure rather than a binding one.

Pricing transparency is paragraph 2A(viii). The Board of each NBFC must adopt an interest rate model built on cost of funds, margin and risk premium; the rate and "the approach for gradations of risk and rationale for charging different rate of interest to different categories of borrowers" must be disclosed in the application form and communicated explicitly in the sanction letter; the rates and gradation approach must be published on the lender's website and updated whenever they change; and sub-paragraph (c) requires the rate to be an annualised rate "so that the borrower is aware of the exact rates that would be charged to the account".

Grievance machinery is paragraphs 2A(v) and 2A(vi). The Board must ensure disputes are heard at least at the next higher level, and every branch must display the name, telephone or mobile number and email address of the Grievance Redressal Officer. Where a complaint is not redressed within one month, the Master Circular directs the customer to the Officer-in-Charge of the Regional Office of the Reserve Bank having jurisdiction over the NBFC's registered office.

On recovery, paragraph 2A(iv)(c) is short and absolute: lenders "should not resort to undue harassment viz; persistently bothering the borrowers at odd hours, use muscle power for recovery of loans etc.", and must train staff to deal with customers appropriately. Paragraph 2A(iv)(b) gives portability a hard number: consent or objection to a request to transfer a borrowal account must be conveyed within 21 days.

Procedure Step by Step

The sequence runs in a fixed order across 8 stages, and each leaves a document the borrower is entitled to hold.

1. Application stage. Under paragraph 2A(i) of the 2015 Master Circular, communications must be in a language the borrower understands, the form must carry the information affecting the borrower's interest so a meaningful comparison with other lenders is possible, and receipt of every application must be acknowledged. Paragraph 2A(viii)(a) puts the rate and the risk-gradation approach in the form itself.

1. Key Facts Statement. The KFS circular (RBI/2024-25/18) dated 15 April 2024 binds all regulated entities, including commercial banks, small finance banks, co-operative banks and NBFCs, for every retail and MSME term loan sanctioned on or after 1 October 2024. The KFS comes in a standardised format with an Annual Percentage Rate computation sheet, an amortisation schedule and third-party charges shown separately. Paragraph 3(c) defines APR as "the annual cost of credit to the borrower which includes interest rate and all other charges associated with the credit facility"; paragraph 5 gives a validity window of at least three working days for tenors of seven days or more.

1. Sanction letter. This is the document the Code is really about: sanctioned amount, terms, annualised rate and method of application, plus the risk-gradation rationale. If yours quotes a monthly or flat rate and no annualised figure, test it against the reducing-balance arithmetic with the flat versus reducing rate calculator and the EMI to interest rate calculator before signing.

1. Agreement and enclosures. Both must reach the borrower at sanction or disbursement. For vehicle finance, paragraph 2A(x) additionally requires the contract to set out the notice period before repossession, when that notice may be waived, the procedure for taking possession, the final chance to repay before sale, and the auction procedure.

1. Post-disbursement changes. Paragraph 2A(iii)(a) requires notice of any change in terms, including disbursement schedule, interest rates, service charges and prepayment charges, and requires rate and charge changes to be effected only prospectively. A retrospective repricing letter is, on that text, outside the Code.

1. Charges never disclosed. Paragraph 8 of the 15 April 2024 circular is blunt: fees and charges "which are not mentioned in the KFS, cannot be charged by the REs to the borrower at any stage during the term of the loan, without explicit consent". The pre-payment charges directions (RBI/2025-26/64) dated 2 July 2025, which apply to loans sanctioned or renewed on or after 1 January 2026, repeat the principle for foreclosure and bar any pre-payment charge that was not disclosed in the sanction letter, the agreement and the KFS. Read that with our notes on the prepayment penalty and the processing fee.

1. On default. Recovery pricing must follow the penal charges circular (RBI/2023-24/53) dated 18 August 2023: a penalty is a penal charge and not penal interest added to the rate, there is no capitalisation, quantum and reason must sit in the agreement and the KFS as well as on the website, and every reminder must communicate the applicable penal charges and the reason for any levy.

1. On closure. Circular RBI/2023-24/60 dated 13 September 2023, effective 1 December 2023, requires original movable and immovable property documents to be released within 30 days of full repayment or settlement, with compensation of Rs 5,000 for each day of delay, and lets the borrower choose the collection office. Where documents are lost, the lender must obtain duplicates at its own cost, with an extra 30 days taking the outer limit to 60.

Borrower Defences Available

A disclosure failure is the evidentiary base for 3 separate routes, and the clocks on them run independently.

The first is internal. Because paragraph 2A(v) of the 2015 Master Circular requires disputes to be heard at least at the next higher level, a written complaint to the Grievance Redressal Officer starts a one-month clock. Ask for 3 things by name: the sanction letter, the executed agreement with every enclosure quoted in it, and the risk-gradation policy as it stood on your sanction date.

The second is the Reserve Bank. The Reserve Bank - Integrated Ombudsman Scheme, 2026 came into force on 1 July 2026 and replaced the 2021 scheme, which still governs complaints received before that date. Filing is free: online at cms.rbi.org.in, by email to crpc@rbi.org.in, or by post to the Centralised Receipt and Processing Centre, Reserve Bank of India, Central Vista, Sector 17, Chandigarh 160017, with a contact centre on toll-free 14448. You must approach the lender first; a complaint lies if no reply arrives within 30 days or the reply does not satisfy you, and it must be filed within 90 days of that timeline expiring or of the lender's last communication, whichever is later. The Ombudsman may award up to Rs 30 lakh for consequential loss and a further Rs 3 lakh for loss of time, expenses and harassment or mental anguish. Product-level rules are indexed at sachet.rbi.org.in.

The third is consumer. The National Consumer Helpline on 1915 and the e-Daakhil portal take deficiency-of-service complaints, and where a caller impersonates an official or demands payment into a personal account the route is cybercrime.gov.in or the helpline 1930. These run parallel to, not instead of, the lender's grievance officer.

Where enforcement has already begun under the SARFAESI Act 2002, the disclosure record becomes the content of the statutory objection. Section 13(2) gives a 60-day demand notice once the account is classified as a non-performing asset; Section 13(3A) lets the borrower file a representation to which the secured creditor must reply with reasons within 15 days; Section 13(4) is the enforcement step. An application to the Debts Recovery Tribunal under Section 17 must be made within 45 days of the measure complained of, and an appeal under Section 18 lies within 30 days but is not entertained unless the borrower deposits 50 per cent of the debt due, which the Tribunal may reduce to not less than 25 per cent for reasons recorded in writing.

Two disclosure-linked money claims are worth pricing first. The Rs 5,000 per day compensation under the 13 September 2023 circular is automatic on delay beyond 30 days, so a three-month delay is a six-figure claim. Foreclosure charges on a floating-rate loan to an individual borrower for a non-business purpose are barred outright, by paragraph 2A(iv)(d) of the 2015 Master Circular and again by the 2 July 2025 directions for loans sanctioned or renewed on or after 1 January 2026; run the foreclosure calculator and the prepayment benefit calculator before accepting a quoted closure figure.

Recent Tribunal/HC Position

The most instructive High Court decision on this limb is Janak Shantilal Patel v M/s Aditya Birla Finance Limited, decided by the Gujarat High Court (Bhargav D. Karia J.) on 30 September 2022 in Special Civil Application No. 2375 of 2016. The petitioners sought a refund of foreclosure charges on the strength of the Reserve Bank's notification dated 14 July 2014 barring such charges on floating-rate term loans to individual borrowers. The Court dismissed the petition, holding that although the petitioners were individual natural persons they had "availed the loan not as 'individual borrowers' but as partner of the partnership firm", pointing to the amended sanction letter dated 13 April 2012 which brought the firm in as applicant and guarantor and to the mortgage of partnership property with an escrow over rental income.

The lesson of that 2022 judgement cuts both ways. Because the sanction letter fixes capacity, purpose and rate, a borrower who never received one, or whose letter omits the annualised rate paragraph 2A(ii) requires, argues from a materially weaker record than one who can produce it. The full text is on Indian Kanoon.

At the level above, the Supreme Court drew the boundary of what disclosure can achieve in Hongkong and Shanghai Banking Corporation Ltd v Awaz and Others, decided on 20 December 2024 in Civil Appeal No. 5273 of 2008 and connected appeals. The National Consumer Disputes Redressal Commission had held by order dated 7 July 2008 that charging credit card interest above 30 per cent per annum was an unfair trade practice. The Supreme Court set that order aside, holding that under Section 21A of the Banking Regulation Act 1949 rates of interest charged by banking companies are not subject to scrutiny by courts, that rate-setting authority belongs to the Reserve Bank, and that where terms were disclosed in the Most Important Terms and Conditions the customer had the necessary information on fees and charges. The reported decision repays reading in full.

Read together, the two judgements draw a clean line. A borrower who complains that a rate is too high is on the wrong side of the 20 December 2024 ruling. A borrower who complains that the rate, the capacity, the gradation rationale or a charge was never disclosed in the sanction letter, the agreement or the KFS is complaining about precisely what the Fair Practices Code and the 15 April 2024 circular were written to compel.

FAQ

What exactly must a sanction letter contain under the Fair Practices Code?

Paragraph 2A(ii) of the Master Circular dated 1 July 2015 requires the sanctioned amount, the terms and conditions, the annualised rate of interest and the method of its application, in a language the borrower understands, with acceptance kept on record. Paragraph 2A(viii)(a) adds the risk-gradation rationale. Under the directions dated 2 July 2025, the applicability of pre-payment charges must also be disclosed there for loans sanctioned or renewed on or after 1 January 2026.

My lender never gave me a copy of the loan agreement. Does that matter?

The 1 July 2015 Master Circular records in terms that not furnishing a copy of the loan agreement or the enclosures quoted in it is an unfair practice, and requires both to be furnished at sanction or disbursement. Raise it in writing with the Grievance Redressal Officer, whose details paragraph 2A(vi) requires to be displayed at the branch, and escalate after one month.

Can a lender charge a fee that was not in the Key Facts Statement?

No. Paragraph 8 of the circular dated 15 April 2024 states that fees and charges not mentioned in the KFS cannot be charged at any stage during the term of the loan without explicit consent. It binds all retail and MSME term loans sanctioned on or after 1 October 2024, and paragraph 9 requires the KFS to be carried as a summary box within the loan agreement itself.

Is penal interest on a missed instalment still allowed?

The circular dated 18 August 2023 requires a penalty for non-compliance with material terms to be levied as a penal charge and not as penal interest added to the rate, prohibits capitalisation, and requires that penal charges on loans to individual borrowers for non-business purposes not exceed those applied to non-individual borrowers for similar non-compliance. Quantum and reason must appear in the agreement, the KFS or most important terms and conditions, and on the website.

How long does the lender have to return my title deeds after closure?

Thirty days from full repayment or settlement, under circular RBI/2023-24/60 dated 13 September 2023, effective 1 December 2023, with compensation of Rs 5,000 for each day of delay. If documents are lost, the lender must help obtain duplicates and bear the cost, with an extra 30 days taking the outer limit to 60 days.

Where do I complain if the lender ignores me?

Approach the Grievance Redressal Officer first and keep the acknowledgement. If no reply arrives within 30 days, or the reply does not satisfy you, file free of cost with the RBI Ombudsman under RB-IOS 2026, in force from 1 July 2026, at cms.rbi.org.in, by email to crpc@rbi.org.in, or by post to the Centralised Receipt and Processing Centre, Reserve Bank of India, Central Vista, Sector 17, Chandigarh 160017, within 90 days. Product-level guidance sits at sachet.rbi.org.in, the National Consumer Helpline is 1915 with e-Daakhil for formal filings, and impersonation or demands for payment into personal accounts belong at cybercrime.gov.in or 1930.