RBI issued new order: The Reserve Bank of India (RBI) has issued directions for penal charges in loan accounts to ensure transparency in disclosure of penal charges and interest rates in loan accounts.
The Reserve Bank of India (RBI) has issued directions to ensure transparency in the disclosure of penalty and interest rates in loan accounts. The Reserve Bank of India (RBI) has expressed concern over the tendency by banks and non-banking financial companies (NBFCs) to use ‘penal interest’ as a means of raising their revenue. The central bank has issued revised rules in this regard.
Under the new rules, in case of default in loan payment, now banks will be able to levy only ‘reasonable’ penal charges on the concerned customer. The guidelines will come into effect from January 1, 2024.
The new rules will apply to all banking entities regulated by the RBI, including all commercial banks, co-operative banks, NBFCs, housing finance companies and all-India financial institutions such as Exim Bank, NABARD, NHB, SIDBI and NABFID. However, these instructions will not apply to credit cards, external commercial borrowings, trade credit.
RBI has issued the following instructions
- Penalties, if any, for non-compliance of important terms and conditions of the loan contract by the borrower, will be treated as ‘Penal Charges’ and ‘Penal Interest’ of interest on advances to be added to the rate will not be imposed as such. No additional interest will be calculated on such charges. However, this will not affect the normal process of interest compounding in the loan account.
- REs shall not include any additional component in the interest rate and shall ensure compliance of these guidelines in letter and spirit.
- A Board approved policy on penalty or flat charge on loan, by whatever name called, has to be formulated.
- The quantum of penalty shall be reasonable and commensurate with non-compliance of material terms and conditions of the loan contract without being discriminatory within a particular loan/product category.
- The penalty in case of loans sanctioned to ‘Individual borrowers for purposes other than business’ shall not exceed the penal charges applicable to non-individual borrowers for similar non-compliance with material terms and conditions.
- The quantum and reason for penalty shall be clearly communicated by the RE to the customers in the loan agreement and the most important terms and conditions/Key Fact Statement (KFS) applicable, besides being displayed on the RE website under interest rates and service charges. .
- The applicable penal charges will be informed whenever reminders are sent to the borrowers for non-compliance of important terms and conditions of the loan. In addition, any instance of imposition of penal fee and the reason therefor shall also be reported.
