Non-banking finance companies (NBFC) will now have to send "adequate prior notice" to their gold loan borrowers, if they plan to auction the jewellery kept as collateral, due to non-repayment of loans, according to the Reserve Bank of India's (RBI) guidelines on the fair practices code for the sector released on Monday.
The notice should lay down the auction procedure and NBFCs must not participate in the process. "The auction process must ensure there is arm's length relationship in all transactions during the auction, including with group companies and related entities," the central bank said.
The gold pledged can be auctioned only through auctioneers approved by the NBFC's board and public advertisement on the auction process must be given in at least two newspapers.
Further, NBFCs must insure the jewellery they receive as collateral and ensure there is an adequate system for storing it in safe custody. Branches that do not have appropriate storage facility should refrain from lending against the yellow metal.
NBFCs should review the systems on an on-going basis, train its staff, and conduct periodic internal inspection.
For NBFC-MFIs, RBI said, the loan agreement must disclose that there will be no penal charges on delayed payment, no security deposit or margin collected from the borrower, the customer cannot be a member of more than one self-help group or joint-liability group and an assurance that the privacy of the borrower’s data will be respected.
In addition, the loan agreement must detail the pricing of the loan and its components, like the interest charge the processing charge, and the insurance premium.
NBFC-MFIs must also ensure that non-coercive methods of recovery are avoided by its employees. "Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at the central designated place on two or more successive occasions...A declaration that the MFI will be accountable for preventing inappropriate staff behaviour and timely grievance redressal shall be made in the loan agreement," RBI said.
These companies should also assign responsibility for compliance to designated individuals within the company and establish systems of internal control including audit and periodic inspection.
