The Reserve Bank of India (RBI) has instructed banks, non-banking finance companies (NBFCs), and other financial institutions to carefully examine their practice of imposing interest charges on loans they disburse. The RBI issued the new directive after discovering that some lenders were engaging in unfair practices when charging interest on loans.
According to a notification issued by the RBI on April 29, 2024, some of the instances that it observed of unfair practices carried out by banks and other financial institutions are as follows:
- Charging of interest from loan sanction date or date of execution of loan agreement and not from actual disbursement date of the money to the customer.
- In the case of loans being disbursed by cheque, instances were observed where interest was charged from the cheque date whereas the cheque was handed over to the customer several days later.
- In the case of disbursal or repayment of loans during the course of the month, some financial institutions were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
- In some cases, it was observed that financial institutions were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.
The RBI discovered the unfair lending practices during the onsite examination of banks conducted for the period ending on March 31, 2023.
What RBI has asked banks to do
The RBI has asked banks to refund the excess interest and other charges to customers. As per RBI, “These and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers. These are matters of serious concern to the Reserve Bank.”The RBI has also asked banks to disburse loan amounts online instead of issuing cheques. Further, the RBI has directed all banks and NBFCs to review their practices regarding modes of loan disbursal, application of interest, and other charges and take corrective action, including system-level changes, as may be necessary, to address the issues highlighted.
Recent initiatives taken by RBI
The central bank has been taking various measures to ensure that banks don’t indulge in unfair practices when giving loans to borrowers.
Banks will now be required to issue a Key Fact Statement (KFS) to borrowers in a simple and easy-to-understand language, which must be in a standardised format. The statement will include all the necessary information about the loan such as interest rate, EMIs, and other charges. This will help borrowers to make informed decisions before signing the loan contract. Banks will also need to obtain an acknowledgement from borrowers to confirm they have understood the loan proposal via the KFS. This new rule will be effective from October 1, 2024, for all fresh retail and MSME loans.
