RBI issues draft guidelines to regulate penal charges on loans

Mumbai, Apr 19 (KNN) The Reserve Bank of India (RBI) has recently issued a proposed draft for regulated entities to ensure transparency in the disclosure of penal charges and interest rates in loan accounts.

In a move to encourage fair lending practices the circular has been floated to prevent these regulated entities from using penal interest and charges as revenue enhancement tools over and above the contracted rate of interest.

The Central Bank is open to comments and feedback from various stakeholders on the draft by May 15, 2023.

The proposed draft is called “Fair Lending Practice - Penal Charges in Loan Accounts.”

RBI, in its draft circular, said: “Penal charges and interest are essentially negative incentives used by lenders to ensure credit discipline among borrowers and to ensure fair compensation for the lender. However, supervisory reviews have revealed that many regulated entities have been using divergent practices when it comes to charging penal interest and charges, leading to customer grievances and disputes.”

The new rules would be applicable on all banking entities regulated by the RBI, including all commercial banks, co-operative banks, NBFCs, housing finance companies, and All India Financial Institutions like EXIM Bank, NABARD, NHB, SIDBI and NaBFID.

These rules will not apply to credit cards that are covered under product specific directions, the RBI said.

Access the full circular here: https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4254.  (KNN Bureau)