Attention all borrowers! RBI just dropped new loan penalty rules that could save you money.

Discover how financial institutions can penalise you with hidden charges, interest rates on late repayments, and conditions that favour them. RBI's draft guidelines reveal all.

RBI DROPS PENALTY RULES

Are you tired of being hit with hidden fees and ambiguous interest rates by lenders? The Reserve Bank of India (RBI) has your back! In their latest move towards more transparent and rational lending practices, the RBI has released a new draft with guidelines for lenders on penal interest charges for loan accounts. The draft is aimed at regulated entities such as banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs) who use penal rates of interest over and above the applicable ones in case of defaults or non-compliance by the borrower. Read on to find out how these new rules could benefit you, the loan borrower.

What are disciplinary charges?

In the event of delayed repayments of EMIs, bounced cheques, or prepayment of loans, among other scenarios, borrowers may incur disciplinary charges.

Need for disciplinary charges.

The intention behind imposing penal interest or charges is to ensure that the lender is adequately compensated and to encourage borrowers to maintain credit discipline by creating disincentives.

What is the focus of RBI's new draft rules?

The Reserve Bank of India's (RBI) new draft guidelines provide comprehensive information on financial institutions' disciplinary charges, late repayment interest rates, terms and conditions for penalties, and the adjustment of interest rates per regulatory directives. These draft regulations are open for comments from banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs) until May 15, 2023.

The new circular emphasises the compounding of penal charges as interest, which the RBI wants to avoid. According to Adhil Shetty (CEO of BankBazaar.com), the central bank's call for conformity can favour borrowers. It should be noted that not all lenders engage in this practice.

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What was the need for RBI to issue new draft rules?

If EMI defaults on a loan, some lenders charge a late payment penalty and interest on the overdue amount. While the original purpose of penal interest was to deter delayed repayments, financial institutions have exploited it to generate additional income in an underserved market.

(Note: Not all lenders are involved in these unethical practices)

What does RBI plan to do now?

The Reserve Bank of India (RBI) has stated that determining interest rates on credit facilities and conditions for resetting interest rates will be closely regulated by relevant regulatory instructions. In addition, RBI has prohibited regulated entities (REs) from adding any additional component to the interest rate.

Disclosing penal charges clearly

According to the draft guidelines by RBI, the disciplinary charges must be mentioned in the key facts and statements (KFS) and shared with the customer to ensure transparency. Although mentioned in the terms and conditions, the calculation of penalty interest is not easily understandable to most borrowers, according to Parijat Garg, Consultant for digital lending.

Proposal by RBI to control discriminatory penal charges

The RBI has released a draft that says that the amount of money charged as a penalty on a loan cannot be higher for individual borrowers than business borrowers. Currently, the penalty charges for delayed payments are only sometimes fair, and lenders sometimes charge a fixed amount as a penalty. In some cases, lenders charge a penalty based on the amount due. The RBI draft proposes that the penalty be proportionate to the amount due based on the number of defaults made.

Include late payment penalties in payment reminders

As per the draft guidelines, the RBI recommends that financial institutions communicate the applicable penal charges whenever they send reminders to borrowers regarding the payment of instalments through emails and messages.

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The Reserve Bank of India (RBI) has released a draft of guidelines aimed at more transparent and rational lending practices, including penal interest charges for loan accounts. The guidelines cover disciplinary charges, late repayment interest rates, terms and conditions for penalties, and adjustment of interest rates per regulatory directives. The RBI wants to control discriminatory penal charges. The draft proposals include disclosing disciplinary charges, late payment penalties in payment reminders, and proportional penalties for individual borrowers.

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