The Reserve Bank of India (RBI) has taken a significant step towards ensuring greater transparency in loan accounts.
The central bank has introduced new directions aimed at clarifying penalty and interest rates disclosure.
Starting from January 1, 2024, these guidelines will be enforced across all banking entities under RBI’s regulation, including commercial banks, co-operative banks, NBFCs, housing finance companies,
and major financial institutions such as Exim Bank, NABARD, NHB, SIDBI, and NABFID.
It’s important to note that these rules won’t be applicable to credit cards, external commercial borrowings, and trade credit.
Key Instructions by RBI
Penalty Charges: Penalties associated with borrowers not adhering to important loan contract terms will now be labeled as ‘Penal Charges.
‘ Moreover, any additional ‘Penal Interest’ on advances won’t be enforced.
This approach ensures that no extra interest accumulates on such penalties, without affecting the standard interest calculation in the loan account.
Simplified Interest Rates: Lenders must not include extra components in the interest rates.
The guidelines should be followed precisely to maintain transparency and fairness.
Approved Penalty Policy: Financial institutions are required to establish a board-approved policy for penalties or flat charges associated with loans.
Reasonable Penalties: Penalties must be rational and proportional to the degree of non-compliance with essential loan contract terms.
Discrimination within specific loan/product categories is strictly prohibited.
Uniformity for Individual Borrowers: The penalty for loans granted to ‘Individual borrowers for non-business purposes’ should align with the penalties imposed on non-individual borrowers for similar non-compliance instances.
Clear Communication: The lender (RE) should clearly communicate the penalty amount and the reasons behind it to customers through the loan agreement, Key Fact Statement (KFS), and the RE’s official website under the ‘interest rates and service charges’ section.
Timely Information: Whenever reminders are issued to borrowers due to non-compliance with vital loan terms, they should be informed about the applicable penal charges.
Additionally, any instance of imposing penal fees and the underlying reasons must be reported.
These new RBI guidelines aim to bring about a higher level of transparency, fairness, and clear communication between borrowers and lenders in the realm of loan accounts.
