The Reserve Bank of India (RBI) is set to cap the penal charges levied by the banks and non-banks related to loans payment missed by borrowers, bringing in enormous relief to borrowers who have been squeezed by usurious charges. The central bank has said that any penalty imposed by regulated entities will be "reasonable and transparent" and that lenders should not use it as a revenue enhancement tool.
In an exclusive conversation with CNBC-TV18, Harsh Vardhan, Former Associate Consultant, Bain & Company and Hardayal Prasad, Former MD & CEO, SBI Card & Payment Services, assessed the impact of RBI's move.
Vardhan said that there should be a one-time fixed penalty for cards as against the high interest rate that gets charged now. He added that uniformity is not possible as charging of interest is a problem now and penal interest is quite high.
" Late charges add profitability to credit card companies," Vardhan told CNBC-TV18.
Prasad added that the draft guidelines from RBI will cover all those under their ambit.
"Currently, there is a free period before charges come into play in credit cards. RBI is trying to bring in some order. Compounding of penal charges is an issue. Compounding interest rate will continue to take place, however," he said.
As of now, most regulated entities don't keep the charges separate. With the order, they will have to do their math and come back, Prasad added.
Last week, RBI said that it will issue draft guidelines for transparency in the penal charges or interest charged on loans. As of now, these charges vary within banks and NBFCs. Currently, there are no guidelines on how much penal interest can be charged by them.
However, once the draft guidelines are out, the RBI will invite comments from various stakeholders such as borrowers, banks and other institutions. After the discussion process, it will issue final guidelines.
In the bi-monthly ’Statement on Developmental and Regulatory Policies’, the RBI said that “divergent practices” by regulated entities with regard to the levy of penal interest have led to customer grievances and disputes have been seen.
RBI said that the intent of penal interest was essentially to inculcate a sense of credit discipline among borrowers through negative incentives but such charges are not meant to be used as a revenue enhancement tool.
In view of the above, RBI said it has decided that any penalty for delay/default in servicing of the loan or any other non-compliance of material terms and conditions of loan contract by the borrower shall be in the form of ‘penal charges’ in a reasonable and transparent manner and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest being charged on the advances.
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
