The Reserve Bank of India (RBI) has recently issued guidelines to banks to provide fixed interest rate options to individual borrowers.
Also, the apex bank directed the lenders to levy only reasonable penalty charges in case of default in Equated Monthly Installments (EMI) payments. The guidelines will be applicable with effect from January 1, 2024.
The guidelines were introduced after the apex bank found that many Regulated Entities (REs), such as commercial and other banks, Non-Banking Finance Companies (NBFCs), and other lenders, were levying penal rates of interest, which was relatively over and above the applicable interest rates.
As per the central bank’s notification on ‘Fair Lending Practice-Penal Charges in Loan Accounts’, the banks and other lending institutions will not be allowed to levy penal interest, which is added to the interest rate charged on the advances.
REs would levy only penal charges in a scenario of defaults or non-compliance by a borrower with the terms on which credit facilities were sanctioned.
Generally, a penal charge is an additional charge levied by a lender on a borrower if there is any delay in payment of Equated Monthly Installments (EMI) or default or non-compliance when it comes to payment contracts.
According to the RBI, the quantum of penal charges must be reasonable and commensurate with the non-compliance of loan contracts and must not be discriminatory within a particular loan or product category.
The directive states that REs are mandated to disclose the quantum and reason for penal charges transparently to a customer in the loan agreement and, most importantly, terms and conditions or Key Fact Statement (KFS).
Also, as per the RBI, there shall be no capitalisation of penal charges. This means that there shall be no further interest computed on such charges.
Having said that, this move will not influence the normal procedures for compounding interest in the loan account.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.