The Reserve Bank of India (RBI) pulled up banks for overcharging borrowers in the guise of penal interest rates and has come up with proposals to protect borrowers from unjustified rates. In a draft circular on levying penal charges on loan accounts, the regulator said that penalty should be levied as a charge and not as a compounding interest rate.
The banking regulator noted that while it has given operational autonomy to banks to charge penalties to borrowers, it had come to light that this was being used as a “revenue enhancement tool”. “It has been observed that many regulated entities use penal rates of interest, overand above the applicable interest rates,” it said in the draft circular.
The quantum of penal charges should be proportional to the defaults/non-compliance of material terms and conditions of loan contract up to a threshold, said its draft circular on ‘Fair Lending Practice – Penal Charges in Loan Accounts’.
