New RBI rules to regulate penal charges on loans to come into effect from next year. Seven things to know
RBI said in a notification on Fair Lending Practice - Penal Charges in Loan Accounts. It has been observed that many Regulated Entities (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 central bank added.
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 central bank said. 1)Penalty, if charged, for non-compliance of material terms and conditions of the 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.
2) The REs shall not introduce any additional component to the rate of interest and ensure compliance with these guidelines in both letter and spirit. 3)The REs shall formulate a Board approved policy on penal charges or similar charges on loans, by whatever name called.
4)The quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of the loan contract without being discriminatory within a particular loan/product category. 5) The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be higher than the penal charges applicable to non-individual borrowers
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