Validity of loan agreement if nbfc does not follow pre-disbursal conditions

What is your dispute / problem and locus standi ?

Is it a real story or an examination hall question paper?

Respected Sir,

Thank you for your response.

This query arises from an actual dispute concerning lending practices of an NBFC and is not a hypothetical academic question.

The concern is whether non-compliance with mandatory pre-disbursal verification requirements, particularly assessment of repayment capacity and scrutiny of bank statements, can amount to deficiency in service, unfair lending practice, or violation of RBI Fair Practices principles when serious repayment hardship subsequently arises.

The intention of the query was not to suggest that the agreement automatically becomes void, but to understand the legal effect and consequences of such procedural violations in the context of responsible lending obligations of NBFCs.

Regards,
Bijoy Kumar Padhi

Respected Sir,

Thank you for your response.

This query arises from an actual dispute concerning lending practices of an NBFC and is not a hypothetical academic question.

The concern is whether non-compliance with mandatory pre-disbursal verification requirements, particularly assessment of repayment capacity and scrutiny of bank statements, can amount to deficiency in service, unfair lending practice, or violation of RBI Fair Practices principles when serious repayment hardship subsequently arises.

The intention of the query was not to suggest that the agreement automatically becomes void, but to understand the legal effect and consequences of such procedural violations in the context of responsible lending obligations of NBFCs.

Regards,
Bijoy Kumar Padhi

This question is of academic interest with vague details of how you are involved in it, you may better clarify it from your tutor.

Sir,

Thank you for the observation.

The query is connected with an actual borrower grievance involving alleged non-assessment of repayment capacity before disbursal of a digital personal loan by an NBFC, resulting in severe repayment hardship and recovery proceedings.

The intention was to understand the legal implications of non-compliance with pre-disbursal due diligence obligations and RBI fair lending principles in such circumstances.

Regards,
Bijoy Kumar Padhi

1.   Mere non compliance with an NBFC internal pre disbursal procedure (such as mandatory collection or verification of Bank statement before sanction/disbursal) does not automatically make the loan agreement void or unenforceable. The legal effect depends on the nature of the violation, whether it breaches RBI regulations, and whether the borrower suffered prejudice, coercion, fraud or misrepresentation.

2.   The borrower accepted loan, money was actually disbursed, repayment obligations were agreed. The borrower can not absolve it's responsibility to repay the loan.

3. However, such conduct can still have serious legal and regulatory consequences.

Respected Sir,

If an NBFC represents before the regulator that certain pre-disbursal checks are mandatory, but in actual practice bypasses those safeguards while disbursing loans, then the issue may not remain a mere internal procedural lapse. It can raise questions relating to regulatory compliance, responsible lending practices, governance standards, and borrower prejudice arising from such non-compliance.

I am also learning from and appreciating the valuable points being discussed in this thread.

Regards,
Bijoy Kumar Padhi

Even if the NBFC had been negligent, the borrower was very well aware of his repaying capacity. How could this be a deficiency in service?

Respected Sir,

With due respect, I understand the point that the borrower is also expected to know his repayment capacity. However, borrower awareness cannot completely absolve the NBFC of its own independent duty of due diligence.

Para 7.1 of the RBI Guidelines on Digital Lending dated 02.09.2022 specifically requires Regulated Entities to capture the economic profile of borrowers, including age, occupation, income, etc., before extending any loan through their own Digital Lending Apps or through Lending Service Providers, with a view to assessing the borrower’s creditworthiness in an auditable manner.

Therefore, the lender’s assessment is not an empty formality. If the NBFC itself represents before the regulator that bank statement upload/verification and e-mandate completion are mandatory pre-disbursal requirements, then those safeguards are clearly meant to support creditworthiness and repayment-capacity assessment.

My limited point is that the borrower’s responsibility and the lender’s responsibility can coexist. The borrower’s awareness of his financial position does not automatically erase the NBFC’s regulatory duty to follow its own declared pre-disbursal checks.

Further, a contractual loan agreement cannot be relied upon to dilute, bypass, or override mandatory regulatory obligations imposed by the RBI. If a regulated lender is required to follow certain pre-disbursal safeguards, the existence of a signed loan agreement by itself cannot answer the question whether the lender complied with those regulatory duties before disbursal.

If such mandatory safeguards were bypassed in practice and borrower prejudice resulted later, then the issue of failure of due diligence, unfair lending practice, regulatory non-compliance or deficiency in service may legitimately arise.

Regards,
Bijoy Kumar Padhi