MUMBAI: Banks and non-bank financing companies are likely to report a dip in their profitability in the June quarter due to the impact of the Reserve Bank of India (RBI) directive on charging interest on loans only from the date of actual disbursement.
Lenders typically earn hundreds of crores of rupees by charging interest even before the customer realises the cheque, often from the date of sanction of the loan, industry insiders said.
On April 29, however, the banking regulator directed all lenders to charge interest from the date of actual disbursement of the funds to the customer after its annual inspection revealed instances of lenders resorting to unfair practices in charging of interest. “Earlier, lenders were taking about 30-45 days to consummate a loan agreement, and they were freely charging interest rate during the period without the actual amount being disbursed to the customer,” the CEO of a housing finance company said on the condition of anonymity.
“So, obviously, this is a big profit hit for mortgage lenders, especially,” the person said.
‘Back to the Drawing Board’
Lenders typically take a longer period to process home loans.
Analysts said the RBI diktat could result in lower loan growth and softer margin growth, especially for housing finance companies.
“April is typically the weakest month for all mortgage lenders, and the RBI circular on interest income recognition only on cheque realisation has sent mortgage lenders back to the drawing board to re-strategise their sourcing models,” said Abhijit Tibrewal, research analyst at Motilal Oswal.
“Mortgage lenders might report weaker disbursement momentum,” he said. “This move could also result in a steeper NIM (net interest margin) compression.”
At the end of May 2024, total home loan outstanding in the country stood at more than Rs 27 lakh crore, growing at 40% in a year.
Some industry officials said the RBI move could also impact loan balance transfers.
“We are seeing a hit on balance transfers as banks need a cheque from our end to close the loan,” said Navin Saini, business head – MSME at Arka Fincap, a non-banking entity.
“A better idea is to just take an intimation from the new lender and an official communication to close the loan, rather than charging the customer in the interim period. Sometimes this process takes two months as well. We have communicated the same to the regulator as well,” he said.
Earlier, the RBI’s annual inspection revealed that lenders were charging interest on the date of execution of the loan agreement and not from the actual disbursement date.
In the case of loans being disbursed by cheque, lenders were charging interest from the date of the cheque and not when the cheque was handed over to the customer several days later.
Also, some lenders were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
“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,” the regulator noted in its circular. “These are matters of serious concern to the Reserve Bank. Wherever such practices have come to light, the RBI through its supervisory teams has advised the regulated entities to refund such excess interest and other charges to customers.”
