In an effort to offer transparency and guidance to borrowers, the Reserve Bank of India (RBI) has released a set of Frequently Asked Questions (FAQs) addressing queries related to penal charges on loans. The FAQs cover various aspects, shedding light on the implementation and applicability of penal charges. Here’s a breakdown of the key points from the RBI’s latest clarifications:
Transition period for existing loans
The RBI has specified that existing loans will transition to the new penal charges regime on the next review or renewal date or within six months from the effective date of the circular, whichever comes first. Interestingly, the review or renewal date is considered post the effective date, even if the accounts undergo a review or renewal before the effective date.
Trade credit and structured obligations have been excluded from the guidelines on penal charges, based on the RBI Master Direction dated March 26, 2019.
The FAQs emphasize that the definition of material terms and conditions for loans may vary based on the credit policy of the bank. Such terms could differ across loan categories and lenders.
Penal charges are confirmed to be applicable in the case of default. The charges must be reasonable, avoiding any capitalisation of further interest.
Interest charged during default will be treated as regular/overdue interest and not categorised as penal interest.
Banks are granted the flexibility to set different penal charges based on the loan amount, ensuring that the structure is reasonable and commensurate with non-compliance.
A uniform structure for penal charges within a particular loan/product category is mandated, irrespective of the borrower’s constitution.
The RBI has clarified that additional penal charges cannot be imposed on the earlier outstanding amount of penal charges.
Contrary to assumptions, the guidelines on penal charges are not exempting Cash Credit and OD facilities, which remain subject to penal interest.
Clear disclosure of the quantum and reason for penal charges is deemed essential and must be provided upfront in the loan agreement and Most Important Terms & Conditions.
