The Reserve Bank of India (RBI) on Wednesday issued draft norms proposing to prohibit capitalisation of penal charges and additional interest levied by banks on customers for loan defaults, in a bid to streamline divergent practices followed by lenders.
The RBI has invited comments from the stakeholders by May 15.
“…Under the extant guidelines, lending institutions have the operational autonomy to formulate board-approved policy for levy of penal rates of interest. It has been observed that many REs (regulated entities) use penal rates of interest, over and above the applicable interest rates, in case of defaults, non-compliance by the borrower with the terms on which credit facilities were sanctioned,” the RBI said in its draft norms.
In order to dis-incentivise lenders from making penal charges a “revenue enhancement tool”, the RBI said if a penalty is charged for a default or non-compliance of material terms and conditions of a loan contract, then the penalty shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on advances. There shall be no capitalisation of penal charges, which means no further interest computed on such charges, the RBI said, adding this will not affect the normal procedures for compounding of interest in the loan account.
The quantum of penal charges shall be proportional to the defaults or non-compliance of material terms and conditions of loan contract, beyond a threshold. This threshold is to be determined by lenders and shall not be discriminatory within a particular loan or loan product category.
Further, the penal charges in case of loans sanctioned to individual borrowers, for purposes other than business, shall not be higher than the penal charges applicable to non-individual borrowers.
“The REs shall ensure that there is a clearly laid down, board-approved policy on penal charges or similar charges on loans, by whatever name called… These instructions shall come into effect from a date to be indicated in the final circular and REs may carry out appropriate revisions in their policy framework and ensure implementation from the effective date,” the RBI said.