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RECENTLY, I read an interesting piece of news about banks that lend to micro-financial institutions, floating a Lenders’ Forum. The most interesting part was that the`A0forum was developing standardised contracts that would be used by all banks while giving loans to MFIs, so as bring about transparency in the decision-making process. Now why can’t banks make similar attempts to standardise loan forms as well as loan contracts in respect of retail banking? Such standardisation would have several advantages for consumers. Take loan forms, for example. If there are simplified, standard formats for each kind of loan, it makes the job of filling them up and providing the required information so much easier for the customer. If all banks have a similar format, even if one bank rejects the application (they sometimes do on the flimsiest of grounds), the person can apply to another bank without wasting considerable time and effort in filing up another form. But far more important is the standardisation of loan contracts, and this has to be done by the banking regulator by constituting a committee consisting of representatives of not just banks but also consumers. That would ensure that first and foremost, the contracts are fair to both the parties. Today, in the absence of such standardisation, the loan agreements are fully loaded in favour of banks. I have seen some loan contracts where bank have unbridled powers to confiscate and sell the mortgaged property without even giving a notice to the consumer. By all means, this is an unfair practice, which can easily be challenged in a court of law. But then, how many people would be in a position to protest against such contracts, when the bank, being a stronger of the two parties,`A0refuses to lend unless the consumer accepts the contract? It is, therefore, absolutely necessary that these loan agreements or contracts are drawn up in such a way that the clauses are fair to both the parties, and all banks should follow this standard format. Today, most banks expect the client to sign the loan agreement without even giving him an opportunity to read it. Standard forms, on the other hand, would be available for consumers to read at leisure and understand every clause. Of course, there will have to be different formats for vehicle loans, home loans, education loans, etc. While drafting them, the drafting committee can also consider some of the problems that people face vis-a-vis these loans and incorporate clauses that could overcome such issues. Take vehicle loans, for example. As part of the loan agreement, the vehicle purchased through bank finance is hypothecated to the bank. Then this is noted in the vehicle registration papers. Once the amount borrowed has been paid, it is only fair that the bank informs the RTO of this and ensures that the vehicle is released from hypothecation. But this is never done. As a result, the consumer has to run around to get the vehicle released from mortgage. Now if we have a standard agreement for vehicle loans, then this part of the bank’s responsibility (which it has been shirking so far) can be built into the contract. Similarly, if you see the complaints that are filed before the courts as well as the Banking Ombudsman, you will notice that a large number of them pertain to unfair practices adopted by banks vis-à-vis loan agreements. For example, loan agreements may impose a heavy penalty for pre-closure of the loan by the customer, but he may be kept in the dark by the bank (After all, the consumer is never given an opportunity to read the full document before signing). By the use of standard forms, all such practices can be eliminated. This would also apply to education loans and home loans. At present, the banking
regulator has formulated detailed guidelines for banks to follow in
respect of each of these loans — home loans, education loans,
vehicle and personal loans. Besides ensuring that those guidelines are
followed stringently by the banks, the regulator also has to come up
with standard loan agreements for all these loans and ensure that
banks use only those.
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