The Reserve Bank of India (RBI) has taken a firm stance on responsible lending practices by instructing banks not to levy penal charges on borrowers for loan repayment delays. This directive comes as part of the RBI’s efforts to ensure fairness and transparency in the financial sector.
In a recent circular, the RBI explicitly emphasized that penal interest or charges should not serve as a means of generating extra revenue beyond the agreed-upon interest rate. This move aligns with the RBI’s commitment to promoting responsible lending practices that safeguard the interests of borrowers.
Key Proposals by RBI for Stricter Loan Penal Charge Regulations
To standardize practices across financial institutions and eliminate discrepancies, the RBI has proposed the following measures:
- No Interest on Penal Charges: Loan accounts that incur non-compliance penal charges will not accrue any interest charges. This prevents the compounding of such charges, benefiting borrowers who find themselves in challenging circumstances.
- Limiting Additional Charges: Financial institutions are barred from introducing supplementary elements to the levied interest charges. This regulation ensures that penal charges are straightforward and clearly understood by borrowers.
- Reasonable and Proportional Charges: Any penal charges imposed must be reasonable and proportional to the degree of non-compliance. Moreover, these charges should not exhibit significant variations across different types of loans.
- Consistency Across Borrower Types: In the case of loans extended to individual borrowers, the penal charges should not exceed those applied to non-individual borrowers. This standardization ensures fairness across all categories of borrowers.
- Transparent Disclosure: Regulated entities are mandated to transparently disclose the quantum of penal charges and the reasons behind their imposition. This promotes transparency and empowers borrowers with comprehensive information.
Implementation and Exceptions
The new regulations governing loan penal charges are set to be enforced from January 1. However, it’s essential to note that these directives do not apply to specific financial instruments such as credit cards, external commercial borrowings, trade credits, and structured obligations.
This move by the RBI stems from a draft circular issued on April 12, aimed at regulating and standardizing penal charges
