RBI directs banks to review practices of mode of disbursal of loans, application of interest and other charges

Reserve Bank of India

The Reserve Bank of India (RBI) on April 29 directed banks to review their practices regarding mode of disbursal of loans, application of interest and other charges.

This comes after RBI’s onsite examination of banks found out instances of lenders resorting to certain unfair practices in charging of interest.

“In the interest of fairness and transparency, all REs (regulated entities) are directed to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system level changes, as may be necessary,” the RBI said in a press release.

The RBI in the onsite examination observed banks charging interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer, the release said.

Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later, the RBI said.

Further, in the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding, release said.

In some cases, it was observed that REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest, release added.

The central bank said wherever such practices have come to light, the RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers.

“REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal,” RBI said.