“The Reserve Bank of India (RBI) has recently issued draft rules on April 12, pertaining to penal charges for loan accounts.
According to the update, the penal charges will be proportionate to the defaults or non-compliance of material terms and conditions of the loan contract, exceeding a certain threshold.”
Penal Charges of Loan Accounts Issues by RBI
“The RBI has specified that the threshold for penal charges should be non-discriminatory within a specific loan or product category, and it will be determined by the regulated entities (REs) as per the central bank’s guidelines.”
Furthermore, the RBI has clarified that the penal charges for loans granted to individual borrowers for non-business purposes should not exceed the penal charges applicable to non-individual borrowers.
According to the central bank, “Penal charges and their associated conditions must be transparently disclosed by regulated entities (REs) to customers in the loan agreement, as well as in the most significant terms and conditions or Key Fact Statement (KFS).”
The RBI has observed that complaints against non-banking financial companies (NBFCs) often revolve around high interest rates and penal charges.
Therefore, the central bank has mandated that NBFCs must clearly mention the penalties for late repayment in bold font in the loan agreement.
The RBI has emphasized that there must be a well-defined policy approved by the Board regarding penal charges or similar fees on loans, regardless of the name used, as confirmed by the Mint Street.
HFCs Asked to Be Transparent, Interest Rates Should Be Annualized
The RBI has directed Housing Finance Companies (HFCs) to ensure transparent disclosure of all fees and charges associated with loan application processing to borrowers.
Additionally, HFCs should provide written loan details to borrowers in the vernacular language or a language that the borrower understands, as stated by the RBI.
The RBI has highlighted that interest rates should be expressed as annualized rates to ensure that borrowers are fully informed about the exact rates that will be applied to their loan account.
In a statement on February 8, RBI Governor Shaktikanta Das announced that the central bank would be issuing draft guidelines to monitor the penal charges imposed by financial entities on consumers for loans.
During the announcement of the monetary policy, Governor Shaktikanta Das stated that currently, regulated entities under the purview of RBI are mandated to have a policy for imposing penal interest on advances.
However, diverse practices are being followed by these entities, and in some cases, the charges are found to be excessive.
