
The Reserve Bank of India (RBI) has recently discovered that some lenders have engaged in unfair practices by charging excessive interest from borrowers. As a result, the RBI has directed banks to refund any excess interest and other charges to customers. The RBI conducted onsite examinations of banks and Non-Banking Financial Corporations (NBFCs) for the period ending March 31, 2023, and found several instances of unfair practices.
Unfair Practices Identified by the RBI
During the examinations, the RBI found that banks were charging interest from the date of loan sanction or loan agreement execution, rather than from the actual disbursement date of funds to the customer. Additionally, in cases where loans were disbursed by cheque, interest was being charged from the date of the cheque, even if it was handed over to the customer several days later. Furthermore, some banks were charging interest for the entire month, regardless of whether the loan was outstanding for the entire month or only for a portion of it. It was also observed that banks were collecting one or more loan instalments in advance but still calculating interest based on the full loan amount.
RBI’s Directive to Banks and NBFCs
To address these issues and promote fairness and transparency, the RBI has issued a circular on April 29, directing banks and NBFCs to review their practices regarding loan disbursal, interest application, and other charges. The RBI expects them to take corrective action, including making necessary system-level changes. The RBI has advised banks to refund any excess interest and other charges to customers through its supervisory teams.
Fair Practices Code and Non-standard Interest Charging
Since 2003, the RBI has issued guidelines on Fair Practices Code to regulated entities such as banks and NBFCs. These guidelines emphasize fairness and transparency in interest charging while allowing banks the freedom to determine their loan pricing policies. The RBI has expressed concerns about non-standard practices of charging interest that are inconsistent with the principles of fairness and transparency in customer dealings.
Borrower Complaints and RBI’s Recommendations
One major complaint from borrowers is the lack of proper communication from banks regarding changes in interest rates. The RBI expects banks to clearly communicate to borrowers, at the time of loan sanction, the potential impact of changes in benchmark interest rates on loan repayments, including changes in EMIs and/or loan tenor. Any increase in EMIs or tenor resulting from such changes should be promptly communicated to borrowers through appropriate channels. Additionally, when interest rates are reset, regulated entities should offer borrowers the option to switch to a fixed rate according to their board-approved policy. The policy should also specify the number of times a borrower can switch during the loan tenor. However, these practices are not consistently followed by banks, according to a banking source.
The RBI is committed to ensuring fairness and transparency in the lending practices of banks and NBFCs. It will continue to monitor and take action against any unfair practices that negatively impact borrowers.
Sir in my daughters account also excess interest charged in 2014
AFI inspection it was pointed out. Bank is not refunding. Partial refund made. At the time of closure due to wrong product calculation excess amt collected.all representations falling on deaf ears.how to claim? Pls advise