RBI Policy: Draft guidelines on levy of penal charges on loans in the works

Reserve Bank of India (RBI) Governor Shaktikanta Das on February 8 said the central bank will issue draft guidelines for monitoring the penal charges levied by financial entities on consumers on loans.

“At present, regulated entities of the RBI are required to have a policy for levy of penal interest on advances. The regulated entities follow divergent practices on levying certain charges. In certain cases, these charges are found excessive,” Das said while announcing the monetary policy.

The Reserve Bank's Monetary Policy Committee (MPC) hiked the key policy rate by 25 bps to 6.5 percent to support economic growth.

The move on the penal charges is intended to enhance transparency, reasonableness and consumer protection, Das said, adding that draft guidelines on the levy of penal charges will seek comments from stakeholders.

What prompted RBI?

Supervisory reviews done by RBI on banks indicated there were diverging practices and excessive charges in some cases which were leading to grievance and disputes, RBI deputy governor M Rajeshwar Rao said at the press conference after the MPC.

He added: "The reviews revealed that most banks use penal rate on top of the normal interest rates in case of payments defaults and non-compliance with the terms and conditions of sanctioning the credit facilities."

RBI is trying to do is frame guidelines, Rao said, which will ensure that there will be kind of a transparent and uniform approach to this issue.