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Reserve Bank of India (RBI) has issued fresh guidelines to the Regulated Entities (REs) corresponding to business and different banks, Non-Banking Finance Companies (NBFCs) and different lenders to guarantee reasonableness and transparency in disclosure of penal interest.
This follows findings that many REs are utilizing penal charges of interest, over and above the relevant interest charges, in case of defaults/non-compliance by the borrower with the phrases on which credit score amenities have been 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 RBI mentioned in a round.
“However, supervisory reviews have indicated divergent practices amongst the REs with regard to levy of penal interest/charges leading to customer grievances and disputes,” it added.
According to the brand new directive, penalty if charged for non-compliance of materials phrases and situations of mortgage contract by the borrower could be handled as ‘penal charges’ and shall not be levied in the shape of ‘penal interest’ that’s added to the speed of interest charged on the advances.
“There shall be no capitalisation of penal charges i.e., no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account,” the round mentioned.
The REs have been requested not introduce any further part to the speed of interest and guarantee compliance to these guidelines in letter and in spirit.
Board permitted coverage
The REs will formulate a Board permitted coverage on penal prices or comparable prices on loans, by no matter title referred to as.
And the quantum of penal prices shall be cheap and commensurate with the non-compliance of materials phrases and situations of mortgage contract with out being discriminatory inside a selected mortgage / product class.
The penal prices in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be increased than the penal prices relevant to non-individual borrowers for comparable non-compliance of materials phrases and situations.
Now the RBI needs the REs to clearly disclose the quantum and motive for penal prices to the purchasers in the mortgage settlement and most necessary phrases & situations / key truth assertion as relevant, in addition to being displayed on REs web site beneath Interest Rates and Service Charges.
“Whenever reminders for non-compliance of material terms and conditions of loan are sent to borrowers, the applicable penal charges shall be communicated. Further, any instance of levy of penal charges and the reason therefor shall also be communicated,” the RBI round mentioned.
These directions will come into impact from January 1, 2024.
And the REs have been requested to perform acceptable revisions in their coverage framework and guarantee implementation of the directions in respect of all of the fresh loans availed/ renewed from the efficient date.
In the case of current loans, the switchover to new penal prices regime can be ensured on subsequent evaluation or renewal date or six months from the efficient date of this round, whichever is earlier, the round mentioned.
These directions will, nevertheless, not apply to Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations that are coated beneath product particular instructions, the RBI has clarified.
