RBI stops Banks from compounding penal interest on loans, Check new guidelines

- Advertisement -

The Reserve Bank of India (RBI) has issued new guidelines on how banks can levy penalties on loan accounts. The new guidelines come into effect on January 1, 2024.

Under the new guidelines, penalties for non-compliance with the terms and conditions of a loan contract will be treated as “penal charges” and not as “penal interest”. This means that penalties cannot be added to the interest rate charged on the loan.

There will also be no capitalization of penal charges, which means that no further interest will be charged on the penalties. However, this does not affect the normal procedures for compounding interest in the loan account.

- Advertisement -

The RBI has also asked banks not to introduce any additional component to the interest rate and to ensure compliance with the new guidelines. Banks will need to formulate a board-approved policy on penal charges or similar charges on loans.

The new guidelines are applicable to all commercial banks, small finance banks (except payment banks), NBFCs including housing finance companies, and other financial institutions such as SIDBI and EXIM banks.

New Guidelines

  • Banks can no longer treat penalties for non-compliance as “penal interest” that is added to the rate of interest charged on the advances. Instead, they must treat them as “penal charges”.
  • There should be no capitalisation of penal charges, meaning no further interest computed on such charges.
  • Banks should not introduce any additional component to the rate of interest.
  • Banks need to formulate a board-approved policy on penal charges or similar charges on loans.
  • The quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of loan contract without being discriminatory within a particular loan product category.
  • In case of loans sanctioned to individual borrowers, for purposes other than business, the penal charges should not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance of material terms and conditions.
  • Banks need to clearly disclose the quantum and reason for penal charges to the customers in the loan agreement and most important terms and conditions as applicable, in addition to being displayed on the banks’ website under Interest rates and Service Charges.
  • Whenever reminders for non-compliance of material terms and conditions of loan are sent to borrowers, the applicable penal charges needs to be communicated. Banks should also communicate any instance of levy of penal charges and the reason.
  • The RBI has asked banks to carry out appropriate revisions in their policy framework and ensure implementation of the instructions in respect of all the fresh loans availed or renewed from the effective date.
  • In the case of existing loans, the switchover to new penal charges regime shall be ensured on next review or renewal date or six months from the effective date of this circular, whichever is earlier.

The RBI has taken these steps to ensure that penal charges are used as a tool to inculcate a sense of credit discipline and not as a revenue enhancement measure. The new norms will also help to improve transparency and fairness in the way that penal charges are levied.

- Advertisement -

Share this article...

Comments

LEAVE A REPLY

Please enter your comment!
Please enter your name here

More News...

Latest

Download Budget 2024-25 PDF, Budget important points and Highlights PDF

Download Budget 2024-25 PDF, Budget important points and Highlights PDF

Govt launches internship scheme for youth, Rs.5000 will be given monthly to Youth

Govt launches internship scheme for youth, Rs.5000 will be given monthly to Youth

Good news for Employees! Govt announced to review NPS and make changes in pension scheme

Good news for Employees! Govt announced to review NPS and make changes in pension scheme

Budget 2024: PSU banks will develop in-house capabilities for credit assessment of MSMEs

PSU banks will develop in-house capabilities for credit assessment of MSMEs

Budget 2024: Mudra Loan Limit increased to Rs.20 Lakh

Budget 2024: Mudra Loan Limit increased to Rs.20 Lakh

Income Tax Rate changed, Check new Income Tax Slab in 2024

Income Tax Rate changes, Check new Income Tax Slab

Rs.25 crore Fraud in SBI: CBI Books Private Firm and Directors for Cheating SBI of Rs 25.62 Crore

Rs.25 crore Fraud in SBI: CBI Books Private Firm and Directors for Cheating SBI of Rs 25.62 Crore

Latest News