The Reserve Bank of India, as part of its directions on safe lending practices, has asked banks not to levy penal interest on borrowers for non-compliance. Penal interest or charges were not meant to be used as a revenue-enhancement tool over and above the contracted rate of interest, the RBI said in a circular.
Due to divergent practices, the central bank has proposed: There will be no interest charged on loan accounts for non-compliance. If a penal charge is levied, there will be no capitalisation or no further interest will be computed on these charges. Regulated entities are not allowed to introduce any additional components on the interest charged. Penal charges must be reasonable and commensurate with non-compliance. These cannot be higher for any specific loan product. The penal charges in case of loans sanctioned to individual borrowers cannot be higher than that charged to non-individual borrowers. The quantum and reasons for penal charges must be clearly disclosed by regulated entities.
The new norms for safe lending practices will come into effect from January 1. The instructions, however, won’t be applicable to credit cards, external commercial borrowings, trade credits and structured obligations. The RBI’s instructions to regulated entities come in response to an April 12 draft circular that proposed to regulate penal charges levied on loan accounts. Since 2018, banks collected over Rs 35,000 crore on account of penal charges, the Union government told Parliament recently.
The collections amount Rs 21,044.4 crore on account of non-maintenance of the minimum bank balance, Rs 8,289.3 crore for additional ATM transactions, and Rs 6,254.3 crore from SMS services.