The Reserve Bank of India (RBI) has issued a fresh set of directives aimed at fostering fairness and transparency in the process of interest charging on loans by Regulated Entities (REs), encompassing commercial banks (excluding payments banks), cooperative banks and Non-Banking Financial Companies (NBFCs).
These guidelines revise the Fair Practices Code for Lenders, originally introduced in 2003, obligating lenders to maintain transparency and fairness while granting them the autonomy to establish their loan pricing policies.
A recent on-site examination of these entities as of 31st March, 2023, uncovered several practices by lenders that were deemed unjust. Some of these were:
- Charging interest from the loan sanction date or loan agreement execution date rather than from the actual disbursement date to the customer. Similarly, instances were noted where interest was levied from the cheque date despite the cheque being handed over to the customer several days later.
- Charging interest for the entire month in cases of loan disbursal or repayment within the month, instead of charging interest only for the period the loan was outstanding.
- Some REs were found to collect one or more instalments in advance while applying interest on the full loan amount, contrary to fair and transparent principles.
The RBI has flagged such practices as inconsistent with fairness and transparency standards. Entities engaging in these practices have been instructed by the central bank to refund excess interest and other charges to affected customers.
In response to these findings, the RBI has mandated all REs to review and rectify their loan disbursal and interest application procedures. This involves implementing necessary system-level adjustments to ensure compliance with the updated guidelines, effective immediately.
