Lenders Liability Laws

On the basis of the recommendations of the

Working Group on Lenders Liability Laws
Constituted by the Government of India,
Reserve Bank of India examined,
in consultation with Government, select
banks and financial institutions,
the feasibility of introducing the Fair
Practices Code for Lenders.
This was done at the direction of Supreme Court in
Famous Mardia chemical Case where the
SARFASAI act was challenged.
 The guidelines on Lenders
Liabilities, as such were finalised
and banks/ all India Financial
Institutions were
advised to adopt the
following broad guidelines and
frame the Fair Practices Code
duly approved by their Board of
Directors.
 Guidelines
(i)Applications for loans and their processing
.

(a) Loan application forms in respect of

priority sector advances up to Rs.2.00 lakhs
should be comprehensive. It should include
information about the fees/charges, if any,
payable for processing, the amount of such
fees refundable in the case of non
acceptance of application, pre-payment
options and any other matter which affects
the interest of the borrower
Time frame within which loan applications up
to Rs.2 lakhs will be disposed of should also
be indicated in acknowledgement of such
applications
 (c) Banks / financial institutions should
verify the loan applications within a
reasonable period of time.
If additional details / documents are
required, they should intimate the
borrowers immediately
(d) In the case of small borrowers seeking
loans up to Rs. 2 lakhs the lenders should
convey in writing, the main
reason/reasons which, in the opinion of
the bank after due consideration, have led
to rejection of the loan applications within
stipulated time.
 (ii)Loan appraisal and terms/conditions
Lenders should ensure that there is proper
assessment of credit application by
borrowers.
They should not use margin and security
stipulation as a substitute for due diligence on
credit worthiness of the borrower.
The lender should convey to the borrower the
credit limit along with the terms and
conditions thereof and
keep the borrower's acceptance of these
terms and conditions given with his full
knowledge on record.
 Terms and conditions and other caveats
governing credit facilities given by
banks/ financial institutions arrived at
after negotiation by lending institution
and the borrower should be reduced in
writing and a copy should be furnished
to the borrower.
As far as possible, the loan agreement
should clearly stipulate credit facilities
that are solely at the discretion of
lenders
 These may include approval or disallowance of
facilities, such as, drawings beyond the sanctioned
limits,
honouring cheques issued for the purpose other
than specifically agreed to in the credit sanction,
and disallowing drawing on a borrowal account
on its classification as a non-performing asset or
on account of non-compliance with the terms of
sanction.
It may also be specifically stated that
the lender does not have an obligation
to meet further requirements of the borrowers
on account of growth in business etc. without
proper review of credit limits.
 In the case of lending under consortium arrangement,
the participating lenders should evolve procedures to
complete appraisal of proposals
in the time bound manner to the extent feasible,
and communicate their decisions on financing or
otherwise within a reasonable time.
Lenders should ensure timely disbursement of loans
sanctioned in conformity with the terms and
conditions governing such sanction.
Lenders should give notice of any change in the
terms and conditions including interest rates, service
charges etc.
Lenders should also ensure that changes in interest
rates and charges are effected only prospectively.
 Post disbursement supervision
Post disbursement supervision by lenders,
particularly in respect of loans upto Rs.2
lakhs, should be constructive with a view to
taking care of any" lender-related" genuine
difficulty that the borrower may face.
Before taking a decision to recall / accelerate
payment or performance under the
agreement or seeking additional securities,
lenders should give notice to borrowers, as
specified in the loan agreement or a
reasonable period, if no such condition exits in
the loan agreement.
 Lenders should release all securities
on receiving payment of loan or realisation of
loan
subject to any legitimate right or lien for any
other claim lenders may have against
borrowers.
If such right of set off is to be exercised,
Borrowers shall be given notice about the same
with full particulars about the remaining claims
and the documents under which lenders are
entitled to
retain the securities till the relevant claim is
settled/paid.
 General
Lenders should restrain from interference in
the affairs of the borrowers
except for what is provided in the terms and
conditions of the loan sanction documents
(unless new information, not earlier disclosed
by the borrower, has come to the notice of the
lender).
Lenders must not discriminate on grounds of
sex, caste and religion in the matter of lending.
However, this does not preclude lenders from
participating in credit-linked schemes framed
for weaker sections of the society.
 In the matter of recovery of loans,
the lenders should not resort to undue
harassment
viz. persistently bothering the borrowers at odd
hours,
use of muscle power for recovery of loans, etc.
In case of receipt of request for transfer of
borrower account, either from the borrower or
from a bank/financial institution,
which proposes to take- over the account,
the consent or otherwise i.e, objection of the
lender, if any, should be conveyed within 21
days from the date of receipt of request
 The Board of Directors of the Bank, should also
lay down the appropriate grievance redressal
mechanism
within the organization to resolve disputes
arising in this regard.
Such a mechanism should ensure that all
disputes arising out of the decisions of lending
institutions' functionaries are heard and
disposed of at least at the next higher level.
The Board of Directors should also provide for
periodical review of the compliance
of the Fair Practices Code and the functioning
of the grievances redressal mechanism at
various levels of controlling offices.
 The adoption of the Code, printing of
necessary loan application forms and
circulation thereof
among the branches and controlling offices
should also be completed latest by end of
June 2003.
The Fair Practices Code, which may be
adopted by banks and financial institutions,
should also be put on their website and
given wide publicity.
A copy may also be forwarded to the
Reserve Bank of India.
 Banking Ombudsman Scheme
The Banking Ombudsman Scheme
enables an expeditious and inexpensive
forum
to bank customers
for resolution of complaints
relating to certain services rendered by
banks.
The Banking Ombudsman Scheme is
introduced under Section 35 A of the
Banking Regulation Act, 1949 by RBI
with effect from 1995.
 The Banking Ombudsman is a senior
official appointed by the Reserve Bank of
India
to redress customer complaints against
deficiency in certain banking services.
As on date, Banking Ombudsmen have
been appointed with their offices located
mostly in state capitals.
All Scheduled Commercial Banks,
Regional Rural Banks and Scheduled
Primary Co-operative Banks are covered
under the Scheme..
 The Banking Ombudsman can receive and
consider any complaint relating to the following
deficiency in banking services (including internet
banking):
non-payment or inordinate delay in the payment
or collection of cheques, drafts, bills etc.;
non-acceptance, without sufficient cause, of
small denomination notes tendered for any
purpose, and for charging of commission in
respect thereof;
non-acceptance, without sufficient cause, of
coins tendered and for charging of commission in
respect thereof;
 non-payment or delay in payment of inward
remittances ;
failure to issue or delay in issue of drafts, pay
orders or bankers cheques;
non-adherence to prescribed working hours ;
failure to provide or delay in providing a banking
facility
(other than loans and advances) promised in
writing by a bank or its direct selling agents;
delays, non-credit of proceeds to parties account
non-payment of deposit or non-observance of the
Reserve Bank directives, if any,
applicable to rate of interest on deposits
in any savings,current or other account maintained
with a bank.
 complaints from Non-Resident Indians having
accounts in India in relation to their remittances
from abroad, deposits and other bank-related
matters;
refusal to open deposit accounts without any valid
reason for refusal;
levying of charges without adequate prior notice to
the customer;
non-adherence by the bank or its subsidiaries to
the instructions of Reserve Bank on ATM/Debit card
operations or credit card operations;
non-disbursement or delay in disbursement of
pension (to the extent the grievance can be
attributed to the action on the part of the bank
 refusal to accept or delay in accepting payment
towards taxes, as required by Reserve
Bank/Government;
refusal to issue or delay in issuing, or failure to
service or delay in servicing or redemption of
Government securities;
forced closure of deposit accounts without due
notice or without sufficient reason;
refusal to close or delay in closing the accounts;
non-adherence to the fair practices code as
adopted by the bank or non-adherence to the
provisions of the Code of Bank s Commitments to
Customers issued by Banking Codes and
Standards Board of India and as adopted by the
bank
 non-observance of Reserve Bank guidelines on
engagement of recovery agents by banks; and
any other matter relating to the violation of the
directives issued by the Reserve Bank in relation
to banking or other services.

A customer can also lodge a complaint on

the following grounds of deficiency in
service with respect to loans and advances
non-observance of Reserve Bank Directives on
interest rates;
delays in sanction, disbursement or non-
observance of prescribed time schedule for
disposal of loan applications;
 non-acceptance of application for loans without
furnishing valid reasons to the applicant;
And non-adherence to the provisions of the fair
practices code for lenders
as adopted by the bank or Code of Banks
Commitment to Customers, as the case may be;
non-observance of any other direction or
instruction of the Reserve Bank
as may be specified by the Reserve Bank for
this purpose from time to time.
The Banking Ombudsman may also deal with
such other matter as may be specified by the
Reserve Bank from time.
 One can file a complaint before the
Banking Ombudsman if
the reply is not received from the
bank within a period of one month
after the bank concerned has
received or the bank
rejects the complaint, or
if the complainant is not satisfied
with the reply given by the bank.
 What is the procedure for filing the
complaint before the Banking Ombudsman?
One can file a complaint with the Banking
Ombudsman simply by writing on a plain
paper.
The complaint can also file it online or
by sending an email to the Banking
Ombudsman.
The complaint should have the name and
address of the complainant,
the name and address of the branch or
office of the bank against which the
complaint is made
 What details are required in the
application?
The facts giving rise to the
complaint supported by documents,
if any,
the nature and extent of the loss
caused to the complainant,
the relief sought from the Banking
Ombudsman
and a declaration about the
compliance of conditions which are
 Is there any limit on the amount
of compensation as specified in
an award?
The amount, if any, to be paid by the
bank to the complainant by way of
compensation for any loss suffered
by the complainant is limited to the
amount arising directly out of the act
or omission of the bank or Rs 10
lakhs, whichever is lower.
 What happens after a complaint is received
by the Banking Ombudsman?
The Banking Ombudsman endeavors to promote,
through conciliation or mediation,
a settlement of the complaint by agreement
between the complaint and the bank named in
the complaint.
If the terms of settlement (offered by the bank)
are acceptable to one in full and final settlement
of one s complaint,
the Banking Ombudsman will pass an order as
per the terms of settlement which becomes
binding on the bank and the complainant.
 If a complaint is not settled by an
agreement within a period of one month,
the Banking Ombudsman proceeds
further to pass an award.
Before passing an award,
the Banking Ombudsman provides
reasonable opportunity to the
complainant and the bank,
to present their case.
It is up to the complainant to accept the
award in full and final settlement of your
complaint or to reject it
 If one is not satisfied with the decision
passed by the Banking Ombudsman,
one can approach the appellate authority
against the Banking Ombudsmens decision.
Appellate Authority is vested with a Deputy
Governor of the RBI.
One can also explore any other recourse
and/or remedies available to him/her as per
the law
The bank also has the option to file an
appeal before the appellate authority under
the scheme.
 Is there any time limit for filing an appeal?
If one is aggrieved by the decision,
one may, within 30 days of the date of receipt
of the award,
appeal against the award before the appellate
authority.
The appellate authority may, if he/ she is
satisfied that
the applicant had sufficient cause for
not making an application for appeal within
time,
also allow a further period not exceeding 30
days.
 The appellate authority may
i. dismiss the appeal; or
ii. allow the appeal and set aside the award; or
iii. send the matter to the Banking Ombudsman
for fresh disposal in accordance with such
directions
as the appellate authority may consider
necessary or proper; or
iv. modify the award and pass such directions as
may be necessary to give effect to the modified
award; or
v. pass any other order as it may deem fit
LOK
ADALATS
 Lok Adalatis a system of
alternative dispute resolution developed in
India. It roughly means "People's court".
India has had a long history of resolving
disputes through the mediation of village
elders.
The system of Lok Adalats is based on the
principles of the Panch Parmeshwar of
Gram Panchayats which were also
proposed byMahatma Gandhi.
 The idea of Lok Adalat was mainly advocated
by Justice P.N. Bhagwati, a former Chief
Justice of India.
Lok Adalat is anon-adversarial system,
whereby mock courts (called Lok Adalats)
are held by the State Authority, District
Authority, Supreme Court Legal Services
Committee, High Court Legal Services
Committee, or Taluk Legal Services
Committee.
These are usually presided over by retired
judges, social activists, or other members of
the legal profession.
 Lok Adalat is one of the fora which has been
playing an important role in settlement of
disputes.
The Legal Services Authorities Act ,1987 has
paved way for administering justice without
resorting to courts.
It is voluntary process and works on the
principle that both parties to the dispute are
willing to sort out their dispute amicably.
Through this mechanism, disputes can be
settled in a simpler, quicker and cost effective
way.

 The National Legal Services Authority

constituted under the Legal Services
Authority Act, 1987 is the Apex Agency
for laying down principles and polices for
making legal services available under the
Act.
Lok Adalats are conducted by State
Level, District Level and Taluk Level Legal
Services Authority in the respective
states.

 The dates for conducting Lok Adalat will be

informed well in advance by the Authorities
concerned to the Banks and advocates.
The Bank will identify cases and furnish list
of cases to the Authorities, who would send
notices to the borrowers to appear before
Lok Adalat.
The Bank would hold intensive pre Lok
Adalat meets with the borrowers and
educate them on the advantages of settling
their dues through Lok Adalat and
encourage them to participate in the Lok
Adalat
 Advantages of Lok Adalats
Cases upto Rs. 20 lakhs can be referred to Lok
Adalats in Civil Courts.
The DRTs/DRATs are also permitted to hold
exclusive Lok Adalats to settle the cases filed
before them.
Every Award of Lok Adalat is deemed to be a
decree of a civil court and no appeal lie before any
court against the award.
Lok Adalats can hear both suit field (litigation)
and non suit filed (Pre- litigation Cases).
Court fee paid by the Bank is refunded if settled
through Lok Adalat
Faster and inexpensive remedy with legal status
THANK
YOU