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RBI issues new guidelines for fair lending practices
August 21, 2023
The Reserve Bank of India (RBI) has issued comprehensive guidelines regarding penal charges in loan accounts in an effort to promote fairness, transparency, and accountability in the lending practices of financial institutions.
These guidelines are applicable to all commercial banks, including Small Finance Banks, Local Area Banks, and Regional Rural Banks, as well as Primary (Urban) Co-operative Banks, Non-Banking Financial Companies (NBFCs), and All India Financial Institutions.
The RBI’s move comes as part of its ongoing efforts to ensure that borrowers are treated fairly and to address customer grievances arising from divergent practices in the imposition of penal charges.
The guidelines emphasize that any penalty imposed for non-compliance with material terms and conditions of a loan contract shall be treated as ‘penal charges’ rather than ‘penal interest.’
This means that penal charges should not be added to the rate of interest charged on the advances, and no further interest should be computed on such charges.
The quantum of penal charges should be reasonable and commensurate with the level of non-compliance. These charges should be clearly disclosed to customers in the loan agreement in terms and conditions, and the Key Fact Statement (KFS).
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