Penalty on loan accounts: RBI tweaks norms, asks banks not to use levy to boost revenue

On August 18, the Reserve Bank of India (RBI) revised the standards for banks imposing penalties on loan accounts due to the borrower’s breach of contractual terms. The central bank said banks could not handle such penalties to increase revenue.
The RBI said banks must treat penalties for non-compliance as a “penalty fee” and not as a “penalty interest” added to interest charged on advances. Additionally, the central bank announced a series of rule changes that will take effect from January 1, 2024.

What does RBI say?

According to the central bank, criminal charges should not be capitalized, which means no additional interest will be charged for these crimes, the RBI clarified, noting that it would not affect intelligence proceedings. usually for the capitalization of criminal charges. Loan account.
The RBI announced the change after it was observed that many banks charge a penalty interest rate, in addition to the applicable rate, in the event of a borrower’s non-compliance or non-compliance with the terms that credit facilities are subject to. penalize. While the intention to collect penalty interest is essentially to instill credit discipline, supervisory assessments have shown different practices among banks, the RBI said. “These fees are not intended to be used as an income enhancement tool beyond contractual interest,” the central bank said.
The RBI observations are important because customers have complained about a lack of transparency from banks while imposing criminal penalties on customers. The regulator said banks should not introduce any additional components in the interest rate and ensure compliance with these guidelines in writing and in spirit.
In addition, banks must develop a board-approved policy on criminal charges or similar allegations against loans, the central bank added.
The amount of criminal charges must be reasonable and commensurate with the breach of key terms and conditions of the loan agreement without discrimination in any product category for specific loan”.
More importantly, the RBI has stated that the criminal penalties for lending sanctioned to individual borrowers, for non-business purposes, should not be higher than the criminal penalties imposed on non-individual borrowers for non-compliance with the same terms and conditions.

Focus on transparency

In addition, the central bank said the amount and reason for criminal charges should be clearly disclosed by banks to customers in the loan agreement and the most important terms and conditions, if any. , in addition to being displayed on the bank’s website under Interest Rates and Service Fees. Additionally, whenever a borrower receives a prompt for non-compliance with a loan’s terms and conditions, applicable criminal penalties should be notified, the RBI said. Banks should also disclose any criminal charges and reasons, the regulator said.

Banks urge to prepare

The RBI has urged banks to make appropriate modifications to their policy framework and ensure that guidelines are followed for all new loans granted or renewed from the effective date. .

The RBI said that in the case of existing loans, transition to the new criminal prosecution regime would be secured on the next review or extension date or six months from the effective date of this circular, whichever is earlier. whichever comes first.

However, these guidelines do not apply to credit cards, outside commercial loans, trade credits and structured bonds governed by product-specific guidelines, the RBI added.