Can't use penal charges to up revenue: RBI to lenders

Mumbai, Apr 13, 2023

Borrowers can expect more reasonable and transparent lending practices as the Reserve Bank of India (RBI) has issued new guidelines for lenders on penal interest charges.

Penal interest charges are additional fees levied on borrowers who default or fail to comply with the terms and conditions of their loan agreement.

Under the new guidelines, banks and non-banking and housing finance companies (NBFCs & HFCs) will not be allowed to introduce any additional components to the interest rate, and penal charges for default or non-compliance will be treated separately from the rate of interest charged on the loan.

The penal charges will be proportional to the defaults or non-compliance of material terms and conditions of the loan contract, and the charges will be clearly disclosed in the loan agreement and displayed on the lender's website.

Lenders will also be required to communicate the applicable penal charges when sending reminders to pay instalments to borrowers.

"Penal interest/charges are not meant to be used as a revenue-enhancement tool over and above the contracted interest rate. However, supervisory reviews have indicated divergent practices among the regulated entities with regard to levy of penal interest/charges leading to customer grievances and disputes," the central bank said.

The guidelines aim to ensure that penal interest charges are used to encourage credit discipline among borrowers and provide fair compensation to lenders. The new norms will come into effect on a date to be indicated in the final circular.

Incidentally, the new guidelines will not apply to credit card penalties as these are governed by separate product guidelines.

[The Times of India]