If you are a loan borrower, the RBI’s latest revelations on banks’ loan activities might concern you! The apex bank has observed that banks have not been fair and transparent when it comes to handling of loan disbursement and repayment.
During the course of the onsite examination of banks, the RBI came across instances of lenders resorting to certain unfair practices in charging of interest. The onsite examination of banks conducted before March 31, 2023.
Here are 4 ways banks are overcharging customers on loans:
- It was found that banks charged from customers interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer, according to a circular issued by the apex bank.
- Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later.
- In the case of disbursal or repayment of loans during the course of the month, some lenders were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding, the RBI said.
- In some cases, lenders were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.
Fair Practices Code for Lenders – Charging of Interest
The guidelines on Fair Practices Code issued to various banks advocate fairness and transparency in charging of interest by the lenders, while providing adequate freedom to regulated entities (REs) as regards their loan pricing policy.
The RBI’s latest circular said that these and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers.
“These are matters of serious concern,” the Reserve Bank said. “Wherever such practices have come to light, RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers. REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal.”
Therefore, in the interest of fairness and transparency, all banks are directed to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system level changes, as may be necessary, to address the issues highlighted above.
What do guidelines on Fair Practices Code say?
As per the guidelines on fair practices code, lenders should ensure timely disbursement of loans sanctioned in conformity with the terms and conditions governing such sanction. Lenders should give notice of any change in the terms and conditions including interest rates, service charges etc. Lenders should also ensure that changes in interest rates and charges are effected only prospectively.
