The Reserve Bank of India (RBI) will replace ‘penal interest’ with ‘penal charges’, the central bank said in its statement on developmental and regulatory policies. The RBI will issue draft guidelines on penal charges and these shall be placed on the RBI website for comments from stakeholders.
“The supervisory review conducted by the RBI reveals that most banks use penal rate on top of the normal interest rate in terms of defaults and non-compliance terms and conditions of entities sanctioning the credit facilities. The reviews indicate that there are diverging practices and there are excessive charges in some cases, leading to grievance and disputes. We are trying to frame guidelines which will ensure that there is a transparent and uniform approach to this issue,” deputy governor Rajeshwar Rao said in the press conference after the announcement of the monetary policy.
While ‘penal interest’ is typically added to the rate of interest being charged on advances, ‘penal charges’ shall be recovered separately and shall not be added to the principal outstanding. But, lenders can alter the credit risk premium in case of any deterioration in credit risk profile of the borrower, the RBI statement said.
“Discussion papers on penal charges on loans will bring more uniformity in aligning of charges, reduction of customer grievances and will bring better credit discipline,” Shanti Lal Jain, managing director and chief executive officer, Indian Bank, said.