Penalty on loan accounts: RBI tweaks norms, asks banks not to use levy to boost revenue
The Reserve Bank of India (RBI) has issued instructions for penal charges in loan accounts to ensure transparency in the disclosure of penal charges and interest rates in loan accounts. The guidelines with respect to penal charges in loan accounts will be effective from January 1, 2024. Under the extant guidelines, lending institutions have the operational autonomy to formulate Board approved policy for levy of penal rates of interest," RBI said in a notification on Fair Lending Practice - Penal Charges in Loan Accounts. It has been observed that many 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, the central bank added. 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 said.