Fair lending and customer protection form the ethical and regulatory foundation of India’s digital lending ecosystem. The RBI mandates that every NBFC adopt a Fair Practices Code (FPC), which sets minimum standards for transparency, borrower treatment, and responsible lending. While the FPC is a mandatory RBI requirement for NBFCs, its principles extend contractually to LSPs. LSPs must therefore align their sales, servicing, and recovery practices with the NBFC’s FPC.

📄Entity Obligations

1. NBFC Direct Obligations

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NBFCs must adopt comprehensive Fair Practices Codes that align with RBI Master Directions and demonstrate commitment to ethical lending practices. The FPC covers loan application procedures, processing timelines, pricing transparency, documentation requirements, and post-disbursement customer service standards. All customer-facing staff must receive regular training on FPC implementation, with compliance monitoring through internal audits and management reviews.

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2. LSP Contractual Extensions

While LSPs don't require independent RBI approval for Fair Practices Codes, they inherit comprehensive customer protection obligations through partnership agreements with NBFCs and banks. Partner institutions typically mandate that LSPs adopt equivalent customer protection standards, implement similar grievance mechanisms, and maintain comparable service quality benchmarks. This contractual extension ensures uniform customer protection across the entire lending ecosystem.

🔄 Uniform Standards: Whether operating as NBFC or LSP, customer protection standards remain identical. The difference lies in implementation accountability—NBFCs answer directly to RBI while LSPs answer to their regulated partners.

📁Core Framework Obligations

📄 Pricing Transparency and Disclosure

⚖️ Recovery Practices and Collection Standards

🖥️ Data Privacy and Information Security

⚠️Prohibited Practices

• Anti-Harassment Measures: Lending entities cannot engage in physical threats, abusive language, public shaming, or persistent unwanted contact. Recovery activities must respect borrower dignity while maintaining professional collection standards.
• Mis-selling Prevention: All loan marketing must provide accurate information about terms, conditions, eligibility criteria, and repayment obligations. Misleading advertisements, false promises about approval rates, or concealed terms constitute regulatory violations. Sales staff must receive training on ethical sales practices and accurate product representation.

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🪧 Enforcement Reality: RBI and state authorities conduct regular market surveillance for fair practice violations. Recent enforcement actions include business shutdowns for harassment, heavy penalties for mis-selling, and management disqualification for repeated violations

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📕 Applicable Frameworks

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Entities should comply with the RBI’s Master Directions and Guidelines, including but not limited to:

1. Outsourcing of Financial Services - Responsibilities of regulated entities employing Recovery Agents
2. Master Circular – Fair Practices Code (FPC) for NBFCs
3. Master Direction – Outsourcing of Financial Services (including Responsibilities of Regulated Entities employing Recovery Agents)
4. Circular on Key Facts Statement (KFS) for Loans & Advances </aside>

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<aside> ⚠️ Note the disclaimers regarding the document's limitations and the need for professional legal advice.

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With fair practices in place, the next focus is securing digital infrastructure and preparing for India’s evolving privacy and cybersecurity laws. Proceed to Step 6: Data Protection & Technology Compliance.