Consumers beware!
Loan rangers should be cautious
According to the RBI’s Master Circular, the consumer has to get all information regarding the loan in writing and in a local language. This information should include the terms and conditions governing the loan 
PUSHPA GIRIMAJI

Thinking of using all that gold jewellery lying idle in your locker, to take a loan for a new business venture? Well, going by the number of banks as well as non-banking financial companies that are offering easy loans against gold these days, you are not the only person thinking along those lines! In fact, the last few that weeks I have been travelling in the southern part of the country and everywhere I look, I see largely two kinds of placards and bill boards. While one prompts you to buy gold jewellery from the advertised shops (I really do not know how people can still afford to buy gold at the current rate!), the other urges you to use the gold in your possession to take a loan! 

But before you give in to the second advertisement, I would suggest that you go through the “Master Circular on fair practices code” released by the Reserve Bank of India in the first week of July. It will help you understand and protect your rights better and also deal better with those giving you those loans. 

The Master Circular, which is a compilation of all the instructions issued by the regulator (RBI) to non-banking financial companies till date (June 30, 2012), tells you what your entitlements are vis-à-vis the loan agreement . 

For example, it tells you that the NBFC has to give you all information regarding the loan in writing and in your local language or in a language understood by you. And this information should not only include the terms and conditions governing the loan, but also the penal interest, if any, charged on late repayments. In fact, the penal interest levied on late payments should be mentioned in bold letters , says the RBI.

 The regulator also mandates that all NBFCs should work out the rate of interest in a transparent manner and explain how this was calculated. The lender shall adopt an interest-rate model , taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest. In addition, the rationale for fixing the interest rate and its calculation should be disclosed to the borrower. It should also be put up on the website of the NBFC and updated regularly. If not, it should be published in newspapers, the RBI says. 

 Pointing out that it has been receiving a number of complaints about the “excessive interest” being charged by some of NBFCs, the regulator says that the governing board of the NBFC should lay out appropriate internal principles and procedures in determining interest rates and processing charges. “Though interest rates are not regulated by the Bank(RBI), rate of interest beyond a certain level may be seen to be excessive and can neither be sustainable nor be conforming to normal financial practice,” says the regulator. (Unfortunately, the regulator does not want to put a cap on the rate of interest, despite demands from the consumer lobby). 

The Master Circular also deals in detail with gold loans. It lays down certain mandatory norms for the safe storage of the jewellery and for their insurance. In case of default requiring auctioning of the jewellery, adequate notice has to be given to the consumer, the regulator says and lays down a detailed procedure for such auction. The gold has to auctioned only by auctioneers approved by the Board, says the Master Circular.

So when you opt for a loan from a non-banking financial company (even if it is a vehicle loan or a personal loan), be sure to look up the RBI guidelines put together in this Master Circular. You can access it on the RBI website, under the head ‘notifications’ issued on July 2.

 If you are going for a gold loan, I would suggest that you first get the jewellery weighed and valued independently by a certified valuer. This will help you when the jewellery is valued by the lender or the NBFC. Even here, insist on a certified valuer assessing the value of the jewellery and issuing a valuation certification, giving the description of the jewllery, it’s weight and its valuation. And be absolutely sure about the track record of the NBFC.

Always get in writing all the terms and conditions governing the loan agreement. If you do not understand any condition in the agreement, do not hesitate to get clarifications. 

Always demand a copy of all the documents signed by you. Read the terms and conditions carefully. In fact the RBI circular says that NBFCs should give the terms and conditions , the rate of interest and all other relevant information in such a ways that it helps the consumer compare it with other offers from competitors and take an informed decision.

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