MUMBAI: The Reserve Bank of India (RBI) on Wednesday proposed to stop the practice of levying penalty by banks in the form of ‘penal interest’ on customers for loan defaults. The central bank said the banks should levy ‘penal charge’ in case of default by customers.
Many lenders use penal rates of interest over and above the rates in case of defaults by customers, said RBI. “Penal interest are not meant to be used as a revenue enhancement tool over and above the contracted interest rate. Supervisory reviews have indicated divergent practices among the REs with regard to levy of penal interest leading to customer grievances and disputes,” said RBI in its draft circular on ‘Fair Lending Practice - Penal Charges in Loan Accounts.