ET Explainer: What RBI's norms on penal charges mean for borrowers
Reserve Bank of India's (RBI) latest guidelines on penal charges on loan accounts have come into effect from April 1. The norms prohibit commercial banks and finance companies from charging borrowers penal rates on loan defaults or any other non-compliance event. Sangita Mehta explains the rationale behind such an action and the rights of the borrower and the lender after the latest guidelines.
What do the new penal interest guidelines say?
RBI has barred banks and finance companies from charging penal interest, often levied on customers for delays in payment of equated monthly instalments (EMI). Also, lenders cannot introduce additional components to the rate of interest as a substitute. RBI has allowed a lender to levy penal charges; however, banks must ensure that there is no capitalisation of the penal charges and no further interest computed on such charges.
Why were these guidelines issued?
The intent behind levying penal interest and charges is to inculcate a sense of credit discipline. These charges are not meant to be used as a revenue enhancement tool. However, RBI's supervisory review found that banks and finance companies impose penalties and charges to enhance their income, leading to customer grievances and disputes.
What is the difference between penal charges and penal interest?
In case of default or non-compliance, the lenders would often impose penalties in the form of penal charges and penal interest rates. A penal charge is a fixed payment charge and not added to the interest, while penal
