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RBI issues new guidelines to ensure fair interest charges by lenders

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The Reserve Bank of India (RBI) has released a new set of directives aimed at promoting fairness and transparency in the way interest is charged on loans by regulated entities (REs), which include all commercial banks (excluding Payments Banks), cooperative banks, and non-banking financial companies (NBFCs).

The guidelines update the Fair Practices Code for Lenders, initially issued in 2003, mandating that lenders exercise transparency and fairness while allowing them the freedom to determine their loan pricing policies.

A recent onsite examination of these entities, as of March 31, 2023, revealed several practices by lenders that were deemed unfair. Some of them included:

  • Charging of interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer. Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later.
  • In the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
  • In some cases, it was observed that REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.

Such practices have been flagged by the RBI as inconsistent with the principles of fairness and transparency. The central bank has instructed those entities found engaging in these practices to refund the excess interest and other charges to the affected customers.

To address these issues, the RBI has directed all regulated entities to review and rectify their loan disbursal and interest application practices. This includes making necessary system-level changes to ensure compliance with the updated guidelines. The directive is effective immediately.

PR Newswire

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