MUST KNOW

Penal charge, interest on your loan? New RBI rules from April 1 – what borrowers should know

New penal charge, interest rules on loans from April 1: The Reserve Bank of India (RBI) has introduced fresh guidelines regarding penal charges and penal interest on loan accounts, effective from April 1. These rules stop banks and finance companies from charging borrowers extra for missing loan payments or breaking other loan rules. Here’s what the new RBI rules on penal charges mean for borrowers and lenders:

New RBI rules for penal charges, interest

As per the new directives, the RBI has stopped banks and finance companies from charging penal interest, usually imposed on customers for late EMI payments. They also can’t add extra charges to the interest rate. However, banks can still charge penalties. But, they must not add these charges to the loan amount or calculate additional interest on them, states an ET report.

Also Read : ITR Filing Tips: Maximizing Your Tax Refunds With These Simple Strategies

The purpose of imposing penal interest and charges is to encourage responsible credit behavior, not to boost revenue. However, the RBI’s review revealed that banks and finance companies often use these charges to increase their income, causing complaints and disagreements among customers.

Penal charges vs penal interest

When borrowers default or fail to comply, lenders typically impose penalties, which can take the form of fixed charges (penal charges) or additional interest (penal interest). Penal charges are a set fee, separate from the interest, while penal interest is an extra rate added onto the customer’s existing interest rate. The RBI instructed banks not to include penal charges in the loan amount and not to calculate additional interest on these charges.

Implementation timeline

The new guidelines apply to all new loans starting from April 1. Existing loans will be subject to the norms starting from June 1, 2024. The RBI postponed the implementation date from January 1 to April 1 to give financial institutions more time to adjust. Both retail and corporate borrowers will face identical penalties for the same loan product.

Determining penal charges

Banks will apply charges based on the defaulted amount. The RBI has instructed lenders to impose charges fairly and consistently according to their board-approved policy. While penal charges should be reasonable, the RBI has not specified a maximum limit for these charges.

Also Read : Flyers Can Now Leave Airport Through Departure Gates If Flights Get Delayed

Applicability to other loan products

The updated guidelines cover securitization and co-lending portfolios but exclude rupee/foreign currency export credit and other foreign currency loans. Regarding non-performing loan accounts, the RBI has instructed banks to reverse any uncollected accrued income.

Source :
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Most Popular

To Top