RBI to frame guidelines on penal charges for default in loan servicing

February 8, 2023 

The Reserve Bank of India (RBI) on Wednesday said that any penalty for delay or default in servicing of the loan by the borrower should be met with penal charges in a reasonable and transparent manner but not with penal interest rate, which more often than not was added to the rate of interest being charged on the advances.

The central bank also said that the penal charges would be recovered from the borrower separately and not added to the outstanding principal amount.

But, in case of any deterioration in credit risk profile of the borrower, the lender is free to alter the credit risk premium under extant guidelines on interest rate.

The central bank has said it will frame guidelines on penal charges shortly. “We are trying to frame guidelines which will ensure that there will be a transparent and uniform approach to the issue of penal charges”, said M Rajeshwar Rao, Deputy Governor, RBI.

[The Business Standard]