Loan closure to KYC norms: What RBI panel's suggestions mean for you

Proposals will improve banking for customers; make lenders be mindful of how they sell products

A Reserve Bank of India (RBI) committee has recommended guidelines to improve customer banking, responding to complaints over the years.

The committee’s recommendations include having auditors to check mis-selling of insurance products, completing KYC updates without service disruption and steps that will make it easier to release pledged assets.

"The Committee reviewed the complaints received under the RE’s Internal Grievance Redress (IGR) mechanism in the last three years and observed that the number of complaints has been range-bound in the region of around one crore complaints per annum," said a RBI circular on June 5, referring to banks as regulated entities (RE).

'Business Standard' picked key recommendations from the circular and asked financial experts for advice.

Recommendation for loan closure

The RBI may consider stipulating a time limit for banks to return property documents to borrowers from the date of closure of the loan account. A bank should pay a penalty or compensation to a borrower if it fails to return the documents on time, said the circular.

There's a way to close a loan and paying the last installment is part of the process. "Before initiating the loan closure process, review the loan agreement and calculate the total outstanding amount to be repaid, including any accrued interest or applicable fees. Contact the lender to confirm the exact repayment amount," says Adhil Shetty, chief executive officer (CEO) of BankBazaar.

Ensure that all outstanding payments are made and reflected in your loan account before initiating the closure process.

"Request a No Objection Certificate (NOC) or a loan closure certificate from the lender. This document confirms that you have fulfilled all your loan obligations and are clear to close the loan," says Shetty.

Collect original property documents or any other collateral papers that were submitted as security for the loan. "Also ensure that all documents are complete and no pages are missing. Request a loan closure letter from the lender as proof that the loan has been successfully closed," says Shetty.

The letter should mention the loan account details, the closure date, and the full repayment amount.

Gold loan

A gold loan is a popular Indian method to borrow funds. An agreement should incorporate the time limit (maximum one month) within which the surplus, if any, from the auction of gold would be refunded to the customers, failing which the company should be required to pay interest as may be stipulated by the Reserve Bank. Any surplus must be credited to the account of the borrower, the circular recommended.

According to media reports, some REs have in the past auctioned gold with informing customers. "Look for a credible source of funding as the gold provided as security needs to come back to you, and you do not want to run the risk of the loan provider running into financial challenges," says Vishal Dhawan, board member, Association of Registered Investment Advisors (ARIA).

It is important to avoid penalties for non-payment and be ready for additional demands from lenders due to price fluctuations. "Since gold prices tend to fluctuate, and gold loans are provided at a margin, a sharp fall in gold prices may mean that more margin may be needed, either by prepaying a part of the loan or offering more gold," says Dhawan.

Gold loans have flexible terms, allowing borrowers to repay through EMIs or make bullet payments. "The latter option is especially useful to those with uncertain incomes who struggle to adhere to a monthly repayment schedule," says M Barve, founder. MB Wealth Financial Solutions.

Mis-selling

Cross-selling of third-party products by the sales team of a bank should be subject to verification by the audit function to ensure that there was no mis-selling, says the RBI circular.

The recommendation seeks to address complaints that bank customers are being sold an insurance policy they didn’t plan to buy. Insurance policies sold by the banks fall under bancassurance, a partnership between an insurance company and a bank. "These policies are sometimes imposed on the customers without proper disclosure of their demerits, which leads to mis-selling," says Naval Goel, founder and chief executive officer (CEO), PolicyX.

While the RBI panel’s suggestions may protect your interests, there is a golden rule to prevent mis-selling: do not buy what you do not understand.

"If you feel that the banking agent is forcing you to buy an insurance plan, you can complain to the bank and further to the banking ombudsman," says Goel.

"If you have identified that a wrong policy has been sold to you and the free look period has passed, you can complain to the bank and wait for 30 days. If your query hasn’t been solved, write to the banking ombudsman and the insurer with all the proof of mis-selling," he says.

The banking ombudsman will consider the documents that you have presented, and eventually, your policy will be closed.

KYC

The circular says that while banks should take steps to periodically update KYC, it must be ensured that operations in an account are not stopped.

Shetty says, "Be cautious of fraudulent attempts to gather your KYC-related information through phishing emails, messages, or phone calls." Financial institutions generally do not request sensitive personal information or KYC details through unsolicited means. Shetty adds, "Verify the authenticity of any such communication before sharing any personal information."

Provide correct contact information, including your mobile number and email address, to the financial institutions you are dealing with for KYC. "This enables effective communication and ensures that you receive all important updates from the financial institution, including those regarding KYC requirements or changes," says Shetty.
 

Essential queries prior to policy purchase

• How does the policy operate?
• Is it a plain-vanilla insurance plan or a hybrid product? The latter tend to be mis-sold more than the former
• Is the capital you are going to invest protected?
• Does it offer fixed or market-linked returns and risks?  
• How reliable are the seller’s return projections?
• What are the expenses you will have to incur in the product?
• What is the lock-in period?
• What are the exit options? 
• What’ covered, what’s excluded, and what conditions do you need to fulfil?