Transparency regulation in India

Overview

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The Reserve Bank of India (“RBI”) introduced microfinance sector regulation in India following the microfinance crisis in the state of Andhra Pradesh in 2010. In response to the crisis, the RBI introduced a prudential and non-prudential regulatory framework with the objective of stabilizing and restoring public confidence towards the industry. For additional details on the prudential framework, please see Section 4(B) of the Circular issued by the RBI on July 1, 2013.

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The truth-in-lending-provisions of the legislation particularly focus on capping the interest rate charged by Non-Banking Financial Companies – Micro Finance Institutions (“NBFC-MFIs”) and introduce statutory requirements for fair lending practices regarding interest rate transparency. The regulation also aims to prevent over-indebtedness and bad loan recovery practices among NBFC-MFIs.

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Disclosure Requirement

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The law requires NBFC-MFIs to provide the borrower a copy of a standard loan agreement form with the loan term and conditions, including the annualized interest rate and method of application. To assist the borrower in conducting a meaningful comparison of terms and conditions among different NBFC-MFIs, each loan application must include the information that affects the borrower.

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Following the conclusion of the loan, each borrower must receive a summary loan card reflecting “the effective rate of interest charged,” all other terms and conditions attached to the loan, information which adequately identifies the borrower and acknowledgements by the NBFC-MFI of all repayments.

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In addition, each NBFC-MFI must prominently display the effective interest rate it charges in all of its offices and official literature.

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Enforcement Mechanism

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The RBI Circulars do not specifically address enforcement mechanisms in the case of violations of credit consumer rights. The Circulars do, however, state that non-compliance with the directions may subject the Lender to the penal provisions of the Reserve Bank of India Act of 1934.  In addition, each NBFC-MFI must be a member of a Self-Regulatory Organization (SRO) recognized by the RBI and adopt a Code of Conduct prescribed by the SRO. The Circulars also mention a “monitoring” role to be played by NBFC-MFIs themselves and by the banks that lend to them.

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For more detailed aspects of the truth-in-lending directives in the India, please download the Legal Summary Document referenced above.