RBI releases draft rules on penal charges related to loans

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) on April 12 issued draft rules on penal charges related to loan accounts. As per the update, the quantum of penal charges shall be proportional to the defaults/ non-compliance of material terms and conditions of loan contract beyond a threshold.

The central bank further said that this threshold is to be determined by the regulated entities (REs) and shall not be discriminatory within a particular loan or product category.

Further, RBI said that the penal charges in case of loans sanctioned to individual borrowers, for purposes other than business, shall not be higher than the penal charges applicable to non-individual borrowers.

"Penal charges, and the conditions precedent therefor, shall be clearly disclosed by REs to the customers in the loan agreement and most important terms & conditions / Key Fact Statement (KFS)," said the

On complaints against non-banking financial companies (NBFC), RBI said that the nature of these complaints is generally pertain to charging of high interest / penal charge and said that NBFCs shall mention the penalties charged for late repayment in bold in the loan agreement.

The central bank said that there shall be a clearly laid down Board approved policy on penal charges or similar charges on loans, by whatever name called.

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

For Housing Finance Companies (HFC), RBI said that HFCs should transparently disclose to the borrower all information about fees/ charges payable for processing the loan application.  Also, HFCs should convey in writing the details of the loan to the borrower in the vernacular language or a language as understood by the borrower.

On interest rates, RBI said that the rate must be an annualised rate so that the borrower is aware of the exact rates that would be charged to the account.

On February 8, RBI Governor Shaktikanta Das said that 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.