The Reserve Bank of India (RBI) has issued fresh guidelines to Regulated Entities (REs) resembling business & different banks, 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 had 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 stated 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.
As per the brand new directive, penalty if charged for non-compliance with materials phrases and circumstances 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 central financial institution stated in a round.
The REs have been requested not introduce any further element to the speed of interest and guarantee compliance to these guidelines in each letter and spirit.
The REs will formulate a Board-approved coverage on penal fees or comparable fees on loans, by no matter title known as.
And the quantum of penal fees shall be affordable and commensurate with the non-compliance with materials phrases and circumstances of mortgage contract with out being discriminatory inside a specific mortgage/product class.
As per the round the penal fees in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be larger than the penal fees relevant to non-individual borrowers for comparable non-compliance of materials phrases and circumstances.
Now the RBI desires the REs to clearly disclose the quantum and the rationale for penal fees to clients in the mortgage settlement and in an important phrases & circumstances/Key Fact Statement (KFS) as relevant, in addition to the data being displayed on the web sites of REs beneath Interest charges 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 stated in a round.
These directions will come into impact from January 1, 2024.
REs have been requested to perform applicable 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 present loans, the switchover to the brand new penal fees regime will probably be ensured on subsequent assessment or renewal date or six months from the efficient date of this round, whichever is earlier, the RBI stated.
These directions will, nevertheless, not apply to Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations that are lined beneath product-specific instructions, the RBI has clarified.
