banks and NBFCs could not charge penal interest on EMI bounce
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If the customer violates the terms of the loan contract and defaults, a suitable penalty or ‘penal charge’ can only be imposed on him and the same cannot be added to the rate of interest charged on the advance. The penal fee should also not be discriminatory to any loan or product category. RBI told RE, ‘No capitalization of penal charges will be done, ie no additional interest will be calculated on such charges. However, this will not affect the normal processes of interest compounding in the loan account.
will not apply to
However, these RBI instructions will not apply to credit cards, external commercial debt, business credit etc. REs may make suitable amendments to their policy framework and follow the instructions in respect of all new loans availed/renewed from the effective date. For existing loans, the switchover to the new penal fee regime will be ensured on the next review or renewal date or six months from the effective date of this circular, whichever is earlier. RBI said it has been observed that many REs use penal interest rates, in addition to the applicable interest rates, in case of default/non-compliance by the borrower with the terms and conditions on which the credit facilities were sanctioned.
Now there will be a break on the exploitation of debtors!
These revised rules were issued after the RBI found that its regulated lending institutions (RE) were charging borrowers in case of default or non-compliance with penal interest rates in addition to the applicable interest rates. Was Above all, the lenders have kept all this subject to the conditions under which the loan facilities were sanctioned. In such cases, banks add penal interest to the interest rates charged on advances, whereas they should have only levied penal charges.
The term penal interest was introduced so that it was used to create a sense of discipline in the borrower regarding the loan, but RBI found that banks and NBFC companies have made it a means to increase revenue. In such a situation, the customers were being subjected to mental and financial harassment. Under the new rules, the applicable penalty for default will now be clearly disclosed to customers and will be in addition to being displayed on the REs website under interest rates and service charges.
what are the new rules
Banks will now be able to levy ‘reasonable’ penal charges on the concerned customer.
Penal interest will not be allowed
These changes will come into effect from January 1, 2024.
There will be no capitalization of penal charges.
Additional interest will not be calculated on such charges.
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