The Reserve Bank of India (RBI) has extended the deadline for implementing charges levied on loan accounts. As per the circular issued by the RBI on December 29, 2023, the deadline has been extended by three months and new rules will be introduced from April 1, 2024, but not later than June 30, 2024.
In August 2023, the RBI issued a circular on how banks can levy penalties on loan accounts. The new guidelines were supposed to come into effect from January 1, 2024. However, considering that certain clarifications were needed in this regard and additional time was required by banks and NBFCs the implementation date is extended.
As per the circular issued on December 29, 2023, “In terms of paragraph 3 (viii) of the circular, the instructions were to come into effect from January 1, 2024. However, considering that certain clarifications and additional time has been sought by some regulated entities (REs) to reconfigure their internal systems and operationalize the circular, it has been decided to extend the timeline for implementation of the instructions by three months. Accordingly, REs shall ensure that the instructions are implemented in respect of all the fresh loans availed from April 1, 2024 onwards. In the case of existing loans, the switchover to new penal charges regime shall be ensured on the next review/ renewal date falling on or after April 1, 2024, but not later than June 30, 2024.”Hence, for all the new loans issued on or after April 1, 2024, the penal charges that will be levied in case of default will be based on the revised guidelines. However, for existing loans the revised penal charges must be implemented by June 30, 2024.
What are the revised guidelines issued by RBI on levying penal charges?
RBI issued the new guidelines after it was observed that many banks use penal rate 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.
The August 2023 circular stated that a penalty, if charged, for non-compliance with terms and conditions of a 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.
This meant that 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 interest in the loan account.
The circular further stated that the penal charges amount shall be reasonable and commensurate with non-compliance with the terms and conditions of the loan contract without being discriminatory within a particular loan or product category.
The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’ such as home loans, personal loans etc, shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance of terms and conditions of the loan contract.
The quantum and reason for penal charges shall be disclosed by banks to the customers in the loan agreement. Further most important terms & conditions/Key Fact Statement (KFS) as applicable, should be displayed on banks’ websites under Interest Rates and Service Charges.
Whenever reminders for non-compliance with the terms and conditions of the loan contract 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.
What RBI said while issuing revised guidelines?
According to RBI, the intent of levying penal interest or penal charges is essentially to inculcate a sense of credit discipline. Such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest.
However, supervisory reviews have indicated divergent practices amongst the banks about the levy of penal interest/charges leading to customer grievances and disputes.
The RBI has asked the banks not to introduce any additional component to the rate of interest and to ensure compliance with these guidelines in both letter and spirit. The banks shall formulate a board-approved policy on penal charges or similar charges on loans, by whatever name called.
