In a significant move, the Reserve Bank of India has released guidelines on disclosure of penal interest saying the penalty for non-compliance with the terms of the loan by the borrower shall be treated as “penal charges” and not as “penal interest” that is added to the rate of interest charged on the advances.
It highlighted that there shall be no capitalisation of penal charges meaning that no further interest will be computed on such charges.
However, this will not affect the normal procedures for compounding of interest in the loan account, the central bank said.
RBI mentioned that it has observed that many REs use penal rates 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 intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest,” the RBI said in a strict tone.
The new arrangements shall come into effect from January 1, 2024.
What are the new changes in the penal interest norms?
Clarifying on the ‘penal charges’ and ‘penal interest’, the central bank said penalty, if charged, for non-compliance of material terms and conditions of 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.
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 of interest in the loan account.
The quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of loan contract without being discriminatory within a particular loan / product category.
For any loans sanctioned to individual borrowers, for purposes other than business, the penal charges shall not be higher than that applicable to non-individual borrowers.
Also, whenever reminders for non-compliance of material terms and conditions of loan are sent to borrowers, the applicable penal charges shall be communicated, RBI said.
