RBI issues revised penal interest guidelines for lending institutions w.e.f. 1st January 2024
As per the existing guidelines issued by RBI, lending institutions had the operational autonomy to formulate Board approved policy for levy of penal rates of interest.
RBI observed that many Lending Institutions use penal rates of interest, over and above the applicable interest rates, in case of defaults / non-compliance by the borrower with the terms on which credit facilities were sanctioned.
On a review of the practices followed by Lending Institutions for charging penal interest/charges on loans, the following new instructions/guidelines have been issued by RBI
(i) Penalty, if charged, for 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 the form of ‘penal interest’ that is added to the rate of interest charged on the advances. There shall be no capitalisation of penal charges i.e., no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account.
(ii) The Lending Institutions shall not introduce any additional component to the rate of interest and ensure compliance to these guidelines in both letter and spirit.
(iii) The Lending Institutions shall formulate a Board approved policy on penal charges or similar charges on loans, by whatever name called.
(iv) 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.
(v) The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance of material terms and conditions.
(vi) The quantum and reason for penal charges shall be clearly disclosed by Lending Institutions to the customers in the loan agreement and most important terms & conditions / Key Fact Statement (KFS) as applicable, in addition to being displayed on REs website under Interest rates and Service Charges.
(vii) Whenever reminders for non-compliance of material terms and conditions of loan are sent to borrowers, the applicable penal charges shall be communicated. Further, any instance of levy of penal charges and the reason therefor shall also be communicated.
(viii) These instructions shall come into effect from January 1, 2024. Lending Institutions may carry out appropriate revisions in their policy framework and ensure implementation of the instructions in respect of all the fresh loans availed/ 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.
These instructions shall, however, not apply to Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations which are covered under product specific directions.
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