Fair Practices Code (FPC) for NBFC- Microfinance Institutions

October 24, 2025
Registrationwala

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Fair Practices Code (FPC) for NBFC- Microfinance Institutions

Fair Practices Code (FPC) for NBFC- Microfinance Institutions

October 24, 2025

Registrationwala

Preface: This post was originally published in 2023 and has been updated on October 24, 2025, to provide you with the most current and accurate information.

Micro Finance Institutions (MFIs) provide financial services to individuals who generally don’t have access to banks and big finance institutions. The MFIs’ primary market is low-income individuals in rural or urban areas. FPC full form is Fair Practices Code. This Code, issued by the Reserve Bank of India (RBI), sets standards for the MFIs in India.

All the MFIs must adhere to the FPC issued by RBI while conducting business activities. In this blog post, we shall provide you with the list of fair practices code for NBFC-MFIs in India.

List of Fair Practice Codes for NBFC-MFIs

The NBFC-MFIs have to follow the fair practice codes set by RBI to guarantee the fair treatment of customers and safeguard their interests. Below are the NBFCs fair practice codes that must be adhered to:

Loan Application and Processing

The FPC code for loan application and processing is explained below:

The loan products should be the same as mentioned in the policy of the company.
The communication should be in Vernacular language or a language that is understood by the borrower.
The necessary information should be included in the application for a loan. The terms and conditions should be in the interest of the borrower. Along with this, the documents that need to be submitted with the application must be included.

Loan Appraisal and Terms/Conditions

Below, we have outlined the FPC for loan appraisal and terms/conditions:

The communication shall be in English or Vernacular language. In case of sanction of loan or letter must contain the amount of loan sanctioned with all the terms and conditions including annualized rate of interest and method of applications.
All the pricing-related information including fees must be added to a standardized simplified factsheet.
The acceptance of terms and conditions must be communicated with the borrower and shall be written in a record and a copy of the same must be provided to the borrower upon request.
Must mention the penal interest charged for late repayment in bold and the sanction letter and agreement. There should be no pre-payment penalties on microfinance loans. If any penalty will be charged then it should be on the overdue amount not on the entire loan amount.

Disbursement of Loans Including Changes in Terms and Conditions

The RBI Fair Practice Code for NBFC for disbursement of loans, including changes in terms and conditions, is stated below:

The terms and conditions such as disbursement schedule, interest rates, service charge, etc will be written in the vernacular language. Any change in the interest rate and charge must be effective and suitable conditions in this regard must be incorporated in the loan agreement.
The decision to recall payment or performance under the agreement must be suitable with the loan agreement.

Disclosures in Loan Agreement/Loan Card

According to RBI rules, the FPC for disclosures in loan agreement/loan card is as follows:

Must have a board-approved standard format for loan agreement and this agreement should be in Vernacular language.
The following must be disclosed in the loan agreement:

All the terms and conditions of the loan.
The pricing of the loan involves three components; interest charge, processing charge, and insurance premium.
There will be no penalty on the delayed payment.
No Security Deposit/ Margin is collected from the borrower.
The borrower cannot be a member of more than one SHG/JLG.
An assurance that data of the borrower will be kept private.

The Loan Card must show these details as per the RBI Regulatory Framework for Microfinance Loans Directions:

Information that adequately identifies the borrower.
Simple factsheet of pricing.
All the conditions which are attached to the loan.
Acknowledgments of all repayments including installments received and the final discharge.
Grievance Redressal System details must be mentioned. The details must include the name and contact number of the nodal officer.

All the entities must be in the language which is understood by the borrower. For non-credit products, the full consent of the borrower and fee structure will be stated in the loan card.

Penal Charges in Loan Accounts

The FPC for penal charges in loans account is outlined below:

Penalties charged for non-compliance with the material terms and conditions of a loan contract by the borrower will be classified as “penal charges.” These charges will not be treated as “penal interest,” which would be added to the interest rate on the loans.
There won’t be any capitalization of penal charges. This means no additional interest will be calculated on these charges. This will not impact the standard procedures for compounding interest in the loan account.
NBFCs are prohibited from adding any additional components to the interest rate. They must comply with these guidelines not just in letter but also spirit.
A Board approved policy must be formulated by the NBFC on penal charges or similar charges on loans.’
The penal charges’ quantum has to be reasonable and it must commensurate with non-compliance of material terms and conditions of loans contract, ensuring no discrimination within any specific loan/product category.
In case of loans sanctioned to ‘individual borrowers’, the penal charges, for purposes other than 'business’, shall not be higher than the penal charges to non individual borrowers for similar non-compliance of material terms and conditions.
The NBFCs must clearly disclose to the customers the quantum and reason for penal charges in the loan agreement and important terms & conditions/Key Fact Statement (KFS). The quantum and reasons must also be displayed on the NBFCs’ websites under Interest rates and Service Charges.
The penal charges must be committed to the borrowers whenever reminders are sent to them regarding non-compliance of material terms and conditions of loan.

General Fair Practices

Here are some general fair practices that must be followed by the MFI NBFCs:

The fair practice code should be in the vernacular language in the office or branch premises. Also, understandable language will be used on the loan card which states the commitment to transparency and fair lending practices.
The staff must be well trained to handle the queries of the customers
The field personnel must be trained to make all the necessary inquiries regarding the existing debt of the borrower and the income of the borrower.
The provided training to the borrowers must be free of cost. The field staff must be trained to provide such services and make the borrower completely aware of the loan procedure and the systems.
All the minimum, maximum, and average interest rates which are charged by microfinance companies should be included in the pamphlets, information booklets, company website, and office premises.
The MFI will be responsible for inappropriate staff behavior or other outsourced agencies.
The RBI guidelines must be followed to check the repayment capacity and due diligence of the borrower.
As per the NBFC-MFI directive, all the loan sanctions and disbursement should be carried out in one central location. The loan disbursement function should be closely followed.
The appropriate measures should be taken to check that the process is straightforward and the loan disbursement is complete within the allocated time period.

Conclusion

The Fair Practice Codes issued by the Reserve Bank of India are designed to promote transparency, fairness and dignity within the financial sector of the country. These codes establish minimum standards for how lenders should interact with their customers. The goals of the FPC is to protect borrowers from becoming victims of the unfair practices, ensure fair treatment for them, build customer confidence via clear communication, ethical behavior and provide effective mechanisms for addressing grievances.

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Frequently Asked Questions (FAQs)

Q1. What does FPC stand for in finance?

A. In finance, FPC stands for Fair Practice Code. This code is issued by the Reserve Bank of India (RBI).

Q2. What are the essential details that must be included in the loan card as per RBI FPC for NBFC-MFIs?

A. The essential details that must be included in the loan card as per RBI FPC for NBFC-MFIs include: (i) information that adequately identifies the borrower, (ii) simple factsheet of pricing, (ii) all the conditions attached to the loan, (iii) acknowledgments of all repayments including installments received and the final discharge and (iv) grievance Redressal System details, including the name and contact number of the nodal officer.