RBI’s latest penal charges norms hurt PSU banks' interest income by 9-11 bps

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26 Aug, 2025 12:21

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The net interest income of the state-owned banks was dented by 9-11 basis points (bps) in the second quarter of current financial year due to implementation of the new penal charges norms of the Reserve Bank of India (RBI).

As per new norms, banks and non-banking finance companies cannot charge an additional sum to borrowers for missing loan repayments or breaking loan covenants as part of rate of interest computation. Should lenders charge borrowers for the same, it must be treated as penalties for non-compliance and accounted as “penal charges”. Penal charges, according to the latest RBI directive, cannot be charged to net interest income and should instead be classified as non-interest income.

This explains why banks faced a reduction in their margins in Q2FY25.

While the circular was applicable for April 1, 2024, banks were given time till June 30, 3024 to fully implement the new rule. Therefore, the impact of these norms were more felt in the July-September quarter vis-a-vis Q1FY25.

While most PSU banks shared details on this front, private banks abstained from providing granular details.

Impact on PSU banks

Union Bank of India’s net interest margin (NIM) declined 11 bps in the second quarter after the implementation of Reserve Bank (RBI) of India’s new guidelines on the penal interest.

“As per RBI guidelines, ‘penal interest’ is to be treated as ‘penal charges’. This will now form part of non-interest income, instead of interest income. Impact of the same is reduction of 11 bps (Q2FY25) and 6 bps (H1FY25) respectively on net interest margins (NIM),” the bank said in a release.

Indian Bank witnessed an impact of 6 bps on the net interest margins (NIM) due to these norms, its managing director and chief executive officer SL Jain said, in an exclusive interview with Moneycontrol, on October 29.

Further, Punjab National Bank’s managing director and chief executive officer, Atul Kumar Goel, in an interview, said the impact was less, which was 1-2 bps, as the bank does not charge much penal interest.

India’s second largest state-owned bank, Bank of Baroda, had an impact of Rs 179 crore in the July-September quarter and Rs 13 crore in April-June quarter on their NII, Debadatta Chand, managing director and chief executive officer, said, in an interview with Moneycontrol, on October 28.

In the July-September quarter, private banks reported better net interest income (NII) and margins compared to their peers in the PSU (public sector units) space because of higher impact felt by the latter due to penal charges norms, which were implemented by the RBI earlier this year.

The growth in NII of private banks remained in the range of 5-25 per cent, which was higher than the range of 5-20 per cent for their state-owned counterparts.

These norms have affected many banks' net interest income and margins.