Sweet Relief for Borrowers: RBI Eases Loan Charge Rules
The Reserve Bank of India (RBI), also known as the Desi central bank, has provided relief to recent loan recipients through a significant announcement. This development concerns the charges associated with loans and is expected to benefit borrowers.
Changes in Loan Charges:
RBI has issued a key circular related to how banks should impose penalties on loan accounts. This decision comes at a time when many banks are applying penal charges. The RBI’s new rules aim to enhance transparency in loan charges.
Penalty Interest Control:
Numerous banks have been found to charge penalty interest rates higher than the actual applicable interest rates when borrowers fail to meet the terms of their loan agreements. To address this issue, new regulations have been introduced. These rules will become effective from January 1, 2024.
Changes in Penalty Charges:
As per the newly issued circular, when a borrower doesn’t adhere to the terms and conditions agreed upon during the loan sanction, the charges levied by banks or other financial institutions will now be known as ‘Penal Charges.’ These charges won’t be tied to the interest rate as ‘penal interest’ and won’t accumulate further interest. However, this won’t impact the policy of compounding interest on the loan account.
EMI Relief for SBI Loan Recipients:
A piece of great news for State Bank of India (SBI) loan recipients—no need to pay EMIs for 12 months, exclusively for them!
Guidelines for Banks:
RBI has already communicated these changes to banks, instructing them not to attach additional components to the interest rate. Banks should establish and follow a board-approved policy regarding penalty charges. The amount of these charges should be fair, unbiased, and in line with the terms of the loan agreement. The agreement should also explicitly inform borrowers about the loan charges.
Clarity in Communication:
RBI emphasizes that when sending reminders to borrowers during loan defaults, banks should clearly mention the subject of penalty charges. The intention behind penal interest or penalty charges is to encourage financial discipline among borrowers and not to generate income from them.
Scope of the Circular:
This new circular from RBI applies to all commercial banks, small finance banks (excluding payments banks), non-banking finance companies, housing finance companies, and other financial institutions.