Applying for Bank Loan? Know your Rights!

As a platform helping thousands of startups and SMEs, start and grow their business - at IndiaFilings.com, we have seen small businesses having a hard time obtaining bank loan. Many small businesses have a harder time obtaining bank loan in India due to various misconceptions held by them. Through this article, we hope to dispel those myths, misconceptions and rumors and provide a detailed guide on your rights with respect to applying for a bank loan.

The Guidelines

Prior to approaching a banker for any loan, it is important for the Entrepreneur to know his/her rights and responsibilities. We have assumed that small businesses would be classified as a MSME (more on MSME criteria and registration guidelines at the bottom) and turned to the RBI’s Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector for writing this guide. You can refer to RBI Master Direction - MSME Lending. Further, the RBI Fair Practices Code for Lenders are also referenced to provide an understanding of the responsibilities placed on Banks to ensure borrowers are treated fairly. You can refer to the RBI Fair Practices Code for Lenders. Finally, in creating this guide, we have relied on the RBI Master Circular - Loans and Advances – Statutory and Other Restrictions to provide a comprehensive guide encompassing all aspects. Refer to RBI Master Circular on Loans & Advances.

Right to Fair Consideration of the Application

As a small business viz. MSME enterprise making a written loan application, Banks are mandatorily required to acknowledge the application, ensure that a running serial number is recorded on the application form and on the acknowledgement receipt, as per the RBI’s Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector. Though the rights mentioned in the RBI Master Direction on Lending to MSME Sector is limited, the Fair Practices Code for Lenders expands on the same and provides additional rights and privileges as follows:

Disclosure of Charges

To maintain fairness and transparency, banks are required to transparently disclose to the borrower all information about fees and charges payable for processing the loan application. Specifically the RBI has mandated that the following information be provided to all loan applicants and borrowers.

Amount of fees refundable if loan amount is not sanctioned or disbursed.
Prepayment options and charges for prepayment of the loan.
Penalty for delayed repayments
Conversion charges for switching loan from fixed to floating rates or vice versa.
Existence of any interest reset clause
Any other matter which affects the interest of the borrower.
‘All-in-cost’ to enable the applicant or borrower to compare the rates charges with other sources of finance.

RBI has mandated that the above information be displayed on the website of the banks for all categories of loan products the processing fee be mandatorily disclosed in the loan application forms.

Timely Credit Decisions

Banks are required to carry out necessary due-diligence on the loan application before arriving at credit decisions, while keeping in mind that timely and adequate availability of credit is important for doing business. Hence, banks are required to delineate the procedure for loan approval, with proper timelines and a mechanism for monitoring applications that are pending for a long-time.

Reason for Rejection

In case of rejection of loan application, the banks are required to convey in writing, the main reasons for the rejection of the loan application within stipulated time.

Summary

As per RBI guidelines, all Banks are required to have a proper system in place for receiving and processing of bank loan applications, as detailed above. The extent of process in-place and adherence to procedure would vary from bank to bank. However, as detailed above, the RBI has provided a set of rights for all loan applicants and it can be enforced by the loan applicant, when required.

Back to Learn

Frequently Asked Questions

Common questions about Bank Loan Application Rights for SMEs in India.

The purpose of this article is to provide a detailed guide on the rights of startups and small and medium enterprises (SMEs) when applying for a bank loan in India. It aims to dispel myths and misconceptions surrounding the loan application process for these businesses.

The article refers to the following key guidelines from the Reserve Bank of India (RBI): Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector, Fair Practices Code for Lenders, and Master Circular - Loans and Advances – Statutory and Other Restrictions.

According to the RBI's Master Direction on Lending to MSME Sector, banks are required to acknowledge loan applications from MSME enterprises, record a running serial number on the application form and acknowledgment receipt, and ensure fair consideration of the application.

Banks must transparently disclose to loan applicants all fees and charges payable for processing the loan application, including fees refundable if the loan is not sanctioned or disbursed, prepayment options and charges, penalties for delayed repayments, conversion charges for switching loan types, interest reset clauses, and the 'all-in-cost' for comparison with other sources of finance.

Banks are required to carry out necessary due diligence on loan applications while ensuring timely and adequate availability of credit, which is important for businesses. They must have a clear procedure for loan approval, with proper timelines and a mechanism for monitoring pending applications.

In case of rejection of a loan application, banks are required to convey the main reasons for the rejection in writing within a stipulated time frame, as per the RBI guidelines.

Yes, the article states that all banks are required to have a proper system in place for receiving and processing bank loan applications, as per the RBI guidelines outlined in the article. However, the extent of implementation and adherence may vary among banks.

According to the article, loan applicants can enforce their rights as outlined in the RBI guidelines when required, if they feel that a bank is not following the proper procedures or violating their rights during the loan application process.

No, the article is a general guide for startups and SMEs in India, providing information about their rights when applying for bank loans. It does not appear to be specific to any particular company or platform.

The article does not provide specific details on the criteria for a business to be classified as an MSME (Micro, Small & Medium Enterprise). However, it mentions that the MSME criteria and registration guidelines can be found at the bottom of the original article.