RBI Announces New Rules for Penal Charges on Loans: Here’s How They Will Impact You

Date : 21/08/2023
Read: 3 mins

How will the new RBI guidelines for penal charges on loans benefit you? These guidelines will apply from next year and will protect you from excessive charges by lenders. Read this article for complete information.

Get ready for a game-changing shift in the world of loans! The Reserve Bank of India (RBI) has just dropped a bombshell with its latest set of rules aimed at regulating penal charges on loans. In a bid to bring transparency and fairness to the lending landscape, these guidelines will come into effect from January 1, 2024. If you're wondering what this means for you as a borrower, we've got you covered. In this article, we'll delve into the all the key things you need to know about these groundbreaking RBI regulations.

Highlights:

Game-changing RBI rules for loan charges.
Transparency and fairness in lending landscape.
Guidelines effective from January 1, 2024.
Benefits all borrowers across banking entities.
Protecting borrowers from excessive charges.

Also Read: Digital lenders to disclose the all costs of loans to borrowers as RBI tightens norms!

The new rules will benefit loan borrowers of all banking entities regulated by the RBI, such as commercial banks, co-operative banks, NBFCs, housing finance companies, and All India Financial Institutions. These entities will have to disclose loan charges and interest rates transparently and fairly. However, these rules will not apply to Trade Credits, External Commercial Borrowings, Credit Cards, and Structured Obligations.

Why the need for new guidelines by RBI?

The RBI has issued new guidelines on penal charges in loan accounts to protect borrowers from unfair and excessive charges. The guidelines come after it was reported that many banks were charging penal rates of interest, over and above the applicable interest rates, in case of defaults or non-compliance by borrowers with the terms of their loans.

What are the new guidelines issued by RBI?

Below are the guidelines issued by RBI:

Penal charges replace penal interest. Lenders can only charge a flat fee, not extra interest, for late payments.
Penal charges are not compounded. Lenders cannot charge interest on the penal charge.
Lenders must disclose penal charges. They must mention the amount and reason in the loan agreement, Key Fact Statement (KFS), and the website.
Penal charges must be fair and proportionate. They should not be excessive for the non-compliance.
Lenders must inform borrowers of penal charges. They must send reminders and explain why they are charging penal charges.
Penal charges for individuals should not be higher than for non-individuals. No variation in charges for same non-compliance.
For existing loans, lenders must follow the new regime within six months or at the next review or renewal, whichever is earlier.