Supreme Court: Drug Users are Victims and Focus Must Be on Breaking the Supply Chain  ||  Supreme Court: Non-Signatories May Join Arbitration When the Dispute Affects Their Rights  ||  Delhi HC: Homemaker’s Services Cannot Be Ignored in Compensation Due to Age  ||  Kerala High Court Directs Photos and Videos of Illegal Vehicle Modifications in Accident Reports  ||  Madras HC: Property Acquired by Catholic Priests Belongs to the Religious Society  ||  Delhi HC: Pre-Marital Disability Cannot Be Used to Avoid Maintenance to Wife and Child  ||  Allahabad HC: Religious Freedom Does Not Confer a Right to a Specific Plot for Cemetery  ||  Allahabad HC: Dissatisfaction With Police Probe Alone Cannot Prove Wilful Neglect under SC/ST Act  ||  Kerala HC: Teachers Cannot Face Criminal Action for Trivial Classroom Discipline Measures  ||  Supreme Court: Past Ad Hoc Service Counts for Pension, Not Seniority Against Direct Recruits    

RBI issues guidelines for Fair Lending Practice - (18 Aug 2023)

Banking

Reserve Bank of India (RBI) has issued various guidelines to the Regulated Entities (REs) to ensure reasonableness and transparency in disclosure of penal interest. Lending institutions have the operational autonomy to formulate Board approved policy for levy of penal rates of interest. Many REs use penal rates of interest, over and above the applicable interest rates, in case of defaults / non-compliance by the borrower with the terms on which credit facilities were sanctioned.

The intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest. However, supervisory reviews have indicated divergent practices amongst the REs with regard to levy of penal interest/charges leading to customer grievances and disputes.

On a review of the practices followed by REs for charging penal interest/charges on loans, the instructions are issued. Penalty, if charged, for non-compliance of material terms and conditions of loan contract by the borrower shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances. There shall be no capitalisation of penal charges i.e., no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account. The REs shall not introduce any additional component to the rate of interest and ensure compliance to these guidelines in both letter and spirit.

The quantum of penal charges shall be reasonable. The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance of material terms and conditions. The quantum and reason for penal charges shall be clearly disclosed by REs to the customers in the loan agreement. These instructions shall come into effect from January 1, 2024. REs may carry out appropriate revisions in their policy framework and ensure implementation of the instructions in respect of all the fresh loans availed/ renewed from the effective date. These instructions shall, however, not apply to Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations which are covered under product specific directions.

Tags : GUIDELINES   LOANS   PRACTICES  

Share :        

Disclaimer | Copyright 2026 - All Rights Reserved