The Reserve Bank of India (RBI) has extended timeline for implementation of rules relating to penal charges in loan accounts by three months. In a circular issued on December 29, 2023, the RBI stated that the new rules will now be implemented from April 1, 2024, with a final cutoff not later than June 30, 2024.
Originally set to take effect from January 1, 2024, the RBI said it has opted for an extension due to requests from several regulated entities (REs) seeking clarification and additional time to reconfigure their internal systems to operationalise the circular's requirements.
According to the central bank, the quantum of penal charges should be proportional to the defaults/non-compliance of material terms and conditions of loan contract up to a threshold, RBI said in its circular on 'Fair Lending Practice - Penal Charges in Loan Accounts'.
There should be no capitalisation of penal charges -- that is no further interest computed on such charges.
As of now, lending institutions have the operational autonomy to formulate board-approved policy for levy of penal rates of interest under the extant of RBI's guidelines. However, many RBI regulated entities (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.
RBI earlier said that the intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline among borrowers through negative incentives and to ensure fair compensation to the lender.
Penal interest/charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest, the central bank said.
Penal charges are levied when borrowers miss or delay repayments of EMIs on time, or in case of cheque bounces, for pre-payment of loans, among other cases.
