The Reserve Bank of India (RBI) has issued a draft circular on ‘Fair lending practice, penal charges on loan accounts’ to regulate penal interest levied by lenders.
“Supervisory reviews have indicated divergent practices among the regulated entities (REs) with regard to levy of penal interest leading to customer grievances and disputes.”
The RBI has instructed the REs for determination of interest rates on credit facilities including condition for reset of interest rates, will be strictly governed by the relevant regulatory instructions issued in this regard.
“REs shall not introduce any additional component of rate of interest. Penalty if charged, for default and 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 terms of penal interest that is added to the rate of interest charged on the advances.”
“There shall be no capitalisation of penal charges which mean no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account.” the draft circular said. Comments may be submitted by May 15.2023.
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