New RBI rules on penal charges on loans: Will there be any upper limit/cap for imposing penal charges?
Reserve Bank extended the new rules on loan account penalty charges to banks and non-bank financial companies (NBFCs) for three more months, until April 1, 2024, as part of fair lending practice.
As a result, regulated entities, such as banks and NBFCs, have been required to guarantee that the directions be followed for any new loans obtained beginning April 1, 2024. In the case of existing loans, the RBI stated that the transition to the new punitive charges regime should occur on or after April 1, 2024, but no later than June 30, 2024.
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Here are important FAQs on Fair Lending Practice regarding penal charges in loan accounts, as released by RBI on January 15, 2024.
What is the upper limit/cap for charging penal charges
The circular does not specify a cap or upper limit for penal charges; however, the REs should bear in mind that the purpose of imposing penal charges is to instill credit discipline and not to be used as a means of increasing revenue when drafting their Board-approved penal charges policy. According to the RBI FAQs on fair lending practices, “Accordingly, the quantum of penal charges shall have to be ‘reasonable’ and ‘commensurate’ with the non-compliance of material terms and conditions of loan contract.”
Whether the interest charged for the period of default (including in case of unpaid EMI) will also be treated as penal interest or regular/overdue interest?
In terms of para 3(i) of the circular, the prescribed guidelines will not affect the normal procedures for compounding of interest in the loan account. Therefore, REs may charge interest on unpaid interest (including on unpaid EMI) at the contracted rate of interest
