Can’t use penal charges to up revenue: RBI to lenders

Borrowers can expect more reasonable and transparent lending practices as the Reserve Bank of India (RBI) has issued new guidelines for lenders on penal interest charges.

Penal interest charges are additional fees levied on borrowers who default or fail to comply with the terms and conditions of their loan agreement.

Under the new guidelines, banks and non-banking and housing finance companies (NBFCs & HFCs) will not be allowed to introduce any additional components to the interest rate, and penal charges for default or non-compliance will be treated separately from the rate of interest charged on the loan.

The penal charges will be proportional to the defaults or non-compliance of material terms and conditions of the loan contract, and the charges will be clearly disclosed in the loan agreement and displayed on the lender’s website.