Mumbai: The Reserve Bank on Friday asked banks to provide fixed interest rate option to individual borrowers and directed the lenders to levy only reasonable penalty charges in case of default in EMI payments. The two decisions are expected to provide a relief to the borrowers amid rising interest rates and most of the retail loans being on floating rates now.
In a directive to banks and NBFCs, including housing finance companies, the Reserve Bank of India (RBI) said that several consumer grievances have been received in relation to elongation of loan tenor or increase in EMI amount with regard to EMI-based floating rate personal loans, without proper communication or consent of the borrowers.
Interest rates have risen since May last year as the central bank hiked the repo rate to tame high inflation.
In a notification on ‘Fair Lending Practice – Penal Charges in Loan Accounts’, the RBI said it has been observed that many 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 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 noted.
However, supervisory reviews have indicated divergent practices amongst the REs with regard to levy of penal interest/charges leading to customer grievances and disputes, the RBI said.
“Penalty, if charged, for non-compliance of material terms and conditions of 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,” it said.
Also, the RBI said there should be no capitalisation of penal charges, which means that no further interest can be computed on such charges.However, this will not affect the normal procedures for compounding of interest in the loan account.
“The quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of loan contract without being discriminatory within a particular loan / product category,” the RBI said.
The instructions on ‘Fair Lending Practice – Penal Charges in Loan Accounts’ will come into effect from January 1, 2024.
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