Year-ender 2024: No RBI repo rate cut, but borrowers get transparent charges structure, digital inclusion via UPI

The RBI's guidelines on penal charges, effective April 2024, brought greater transparency and fairness to lending practices.

There was no repo rate cut cheer for home loan borrowers in 2024 as the Reserve Bank of India (RBI) left this key policy rate unchanged, but it did introduce a host of regulations for the benefit of bank customers.

For example, the central bank has made it mandatory for banks to provide Key Facts Statement (KFS) and Annualised Percentage Rate (APR) to their retail borrowers, ensuring that they get a clearer picture of the total costs associated with taking and repaying a loan.

But that's not all. The RBI has also prohibited banks from charging penal interest rates on loan defaults, introduced stricter rules for peer-to-peer (P2P) lending platforms and increased unified payments interface (UPI) transaction limits to promote digital financial inclusion. It also rolled out Daava Soochak, an online claim status tracker for depositors of failed banks and so on.

Repo rate remains steady, but home loan rates rise

Although the central bank kept the repo rate unchanged in 2024, it shifted its stance from 'withdrawal of accommodation' to 'neutral' in the October policy. Meanwhile, HDFC Bank increased its home loan rates for new borrowers by 40 basis points, raising the lowest interest rate on a Rs 50-lakh home loan from 8.35% to 8.75%. Similarly, the State Bank of India (SBI) raised its effective new home loan rates by 10 basis points, from 8.4% to 8.5% for a Rs 50-lakh loan. Financial experts attribute these hikes to liquidity constraints affecting several banks, including HDFC Bank.

Loan transparency boosted: KFS and APR reveal true loan costs

Borrowers of retail loans can better understand the true cost of their loans, with the KFS and APR provided by banks and non-banking financial companies (NBFCs). The KFS promotes transparency, enabling borrowers to make informed decisions by clearly outlining the total costs associated with taking and repaying a loan (see graphic).

The APR offers a comprehensive picture of the loan's cost, encompassing not only the interest rate but also additional expenses such as insurance premiums, legal fees, and other charges. This ensures that borrowers have a complete understanding of their loan's total cost.

No penal interest rates on loan defaults

The RBI's guidelines on penal charges, effective April  2024, brought greater transparency and fairness to lending practices. Previously, banks, NBFCs and housing finance companies (HFCs) would charge additional interest rates as penalties for loan defaults or non-compliance with credit terms. However, the banking regulator has now prohibited financial institutions from charging penal interest rates. Instead, lenders can only levy reasonable penal charges on the defaulted amount, as per their board-approved policy, and without computing further interest on these charges.

Also read | How RBI’s rules on penal charges will help loan borrowers

P2P lending platforms face stricter rules from RBI

The RBI released amended guidelines for P2P lending platforms in August 2024. These guidelines aim to enhance transparency, curb illegal activities, and promote fair practices in the P2P lending industry.

Key provisions include prohibiting credit enhancement or guarantees, thereby making lenders bear all losses. Additionally, platforms must disclose lender losses and monthly portfolio performance, adopt objective pricing policies with upfront fee disclosure, and establish board-approved policies for matching lenders and borrowers. Furthermore, the guidelines emphasise data protection, requiring platforms to obtain borrower consent before sharing their details with lenders.

UDGAM to tackle unclaimed bank deposits

According to the RBI's annual report for 2023-24, a staggering Rs 78,213 crore in unclaimed deposits remains with banks across India as of March 2024. This represents a significant increase from the Rs 62,225 crore reported in March 2023.

These unclaimed funds are held in the Depositors' Education and Awareness Fund (DEAF), earning a simple interest rate of 3 per cent per annum. To facilitate the recovery of these deposits, the RBI launched the Unclaimed Deposits — Gateway to Access Information (UDGAM) portal in August 2023. This centralised platform enables users to track and consolidate unclaimed deposits across multiple banking institutions.

Daava Soochak: Instant online claim status for depositors

Depositors of failed banks can now track the status of their claims online, instantly with the Deposit Insurance and Credit Guarantee Corporation (DICGC) new initiative, Daava Soochak which was launched this year. The DICGC, a subsidiary of the RBI, launched this online claim status tracker to provide depositors with a convenient and transparent way to monitor their claims.

As per the amended DICGC Act, 2021, depositors are entitled to receive their claims of up to Rs 5 lakh within 90 days. Previously, depositors had to wait for the RBI to decide on the bank's liquidation before accessing the insurance cover. With Daava Soochak, depositors can now instantly check the status of their claims on the DICGC website, providing a more convenient experience.

Banks curtail credit card benefits to curb misuse

Banks in India have been curbing benefits on credit cards in 2024 to prevent misuse and manage costs. For instance, ICICI Bank has capped reward points on spending categories like groceries, utilities, and insurance. HDFC Bank has also introduced limits on reward point redemption for specific credit cards.

Other banks like YES Bank and Axis Bank also made changes to their credit card benefits during the year. The former capped the number of rewards points that can be redeemed for flights and hotels, while Axis Bank revised fees and charges on its credit cards. SBI Card increased finance charges and added fees for utility payments. According to the card issuers, these changes are meant to promote responsible lending practices and prevent exploitation of credit card benefits.

NPCI introduced new feature for shared digital payments

The National Payments Corporation of India (NPCI) had launched UPI Circle, a feature that enables two individuals to share a single bank account for digital payments. This initiative aims to empower individuals who rely on others for financial management, providing them with greater control and autonomy over their financial transactions.

Also read | Google Pay UPI Circle: A step-by-step guide to add family members, make payments

Hike in UPI transaction limits: A push for digital financial inclusion

The RBI has made some changes this year to encourage more people to use the UPI. To start with, the RBI has increased the per-transaction limits for UPI 123Pay and UPI Lite payment mechanisms.

The per-transaction limit for UPI 123Pay has been raised from Rs 5,000 to Rs 10,000. This is beneficial to feature phone users who can now make secure payments using UPI without needing an internet connection. UPI 123Pay uses IVR (Interactive Voice Response) to facilitate transactions.

The limit for UPI Lite balance has also been increased, from Rs 2,000 to Rs 5,000. UPI Lite is a convenient way to make small payments, and users can add funds to their UPI Lite account directly from the UPI App. UPI Lite is available on popular payment apps like Paytm, BHIM App, and GooglePay.

These changes are especially beneficial for under-served categories, such as senior citizens and users from rural India with limited digital access. The increased limits can also be useful for making utility bill payments and sending money to other users.