Penal charges on loan accounts: RBI issues clarifications before new rules come into force; 6 key points to know
The Reserve Bank of India (RBI) has released a set of clarifications to clear the air on penal charges on loan accounts.
Notably, the RBI had released guidelines on August 18, 2023 which stipulated that the penalty for non-compliance will be treated as penal charges and not in the form of penal interest. Also, there will be no further interest computed on such charges.
The key rationale was that the intent of levying penal charges is meant 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.
Earlier, the new rules were set to come into force from Jan 1, 2024, but RBI — via a circular on Dec 29, 2023 — deferred the implementation by another three months to April 1, 2024.
The switchover to new penal charges regime for existing loans will be ensured on the renewal date falling on or after April 1, 2024 but not later than June 30 this year.
The material terms and conditions will be defined as per the credit policy of the bank and they may vary from one category of loan to another, and from bank to bank based on their own assessment.
No, additional penal charges cannot be levied on the earlier outstanding amount of penal charges.
Yes, the instructions apply to all credit facilities except those specifically exempted in the circular.
On this, RBI has clarified that there is no upper limit or cap for penal charges. The banks, while formulating their policy, should keep in mind that the intent behind levying penal charges is to inculcate a sense of credit discipline and not to increase their revenue.
Therefore, the quantum of penal charges need to be ‘reasonable’ and ‘commensurate’ with the non-compliance of loan
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