RBI issued Guidelines to direct Penal Charges for Loan by Banks

The Reserve Bank of India(RBI) prohibits banks and other lenders from charging borrowers punitive interest for failing to comply with the contractual terms and conditions of a loan to maintain fair lending practises and safeguard customers’ interests.

RBI stated in a notification that any penalty should be viewed as “penal charges” rather than “penal interest” on the existing lending rate.

The RBI discovered that many lenders levy penalty rates on loans that are higher than the relevant interest rate in the event of defaults that violate the conditions of credit facilities.

RBI stated that the purpose of the penalty fee is “essentially to instill a sense of credit discipline,” rather than to increase revenue.

Lenders should not add any extra components to interest rates and should follow these standards “both in letter and spirit,” according to the bank.

RBI also requested that banks develop a board-approved policy on punitive penalties or other equivalent levies on loans. Furthermore, the bank stated that the amount of punitive costs should be “reasonable” and “not discriminatory” within a certain loan or product category.

It also demanded that the lenders provide the amount and basis for the penalties.

The directives would take effect on January 1 and would not apply to credit cards, external commercial borrowings, trade credits, or structured commitments, according to the statement.