RBI asks lenders to be fair on charging of interest from borrowers

RBI issues fair practices code for lenders, addressing unfair interest charging practices, effective immediately. Cheque-based disbursements, advance instalments under scrutiny.
Reserve Bank of India
Reserve Bank of India (Photo | PTI)

MUMBAI: On the heels of the notifying the key facts statement on loan pricing earlier this month to be implemented from October 1, the Reserve Bank on Monday issued a fair practices code for lenders on charging of interest from borrowers.

Guidelines on fair practices code has been issued to various types of lenders or regulated entities since 2003 to being about fairness and transparency in charging of interest, even as providing freedom to them to price their loans. The regulator said the new guidelines are effective immediately and are applicable to all lenders expect payments banks.

Issuing the new guidelines, the RBI said in a notification that “during the course of the onsite examination of regulated entities for the period ending March 2023, the RBI came across instances of lenders resorting to certain unfair practices in charging of interest.”

Some such unfair practices found are given below: a) charging of interest from the date of sanction of the loan or date of execution of the loan agreement and not from the date of actual disbursement of the funds. 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.

A second recurring instance of unfair practice wherein disbursal or repayment of loans during the course of the month, some lenders were charging interest for entire month, rather than charging only for the period for which the loan was outstanding.

Another unfair practice that has been found is that some lenders were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.

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 to the RBI, the notice said, which also encouraged to use online account transfers in lieu of cheques.

“In the interest of fairness and transparency, all regulated entities 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,” concluded the circular.

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The New Indian Express