Banks will not be able to recover penalty interest due to delay in filling loan EMI, RBI issued new notification

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Mumbai : If you have taken a loan from any bank in India and for some reason could not pay its EMI (monthly installment) on time, then after doing so, the bank used to add interest on interest after imposing penalty on you. Now, after the delay in paying the EMI, banks will impose penalty charges on you, but they will not be able to charge interest on interest. The Reserve Bank of India (RBI) has issued a new notification for this on Friday, in which special instructions have been given to the banks. RBI has asked banks and other financial institutions to provide the option of choosing a fixed (fixed) rate of interest to the customers who have taken loans while fixing the interest rates afresh.

Banks secretly increase the EMI of the loan

In a notification issued on Friday, the RBI said that it has been observed that the loan tenure or monthly installment (EMI) is increased when the interest rate increases and the customers are not properly informed about it and neither their Consent is taken. To overcome this concern, the Reserve Bank has asked the units coming under its regulation to make a proper policy framework.

Give timely information to the customers about the increase in EMI or loan period

RBI said that at the time of loan approval, banks should clearly tell their customers that in case of change in the standard interest rate, what could be the effect on EMI or loan tenure. The extension of EMI or loan tenure should be intimated to the customer immediately through proper channel. Further, under the policy, the borrowers may also be informed as to the number of times they will have the opportunity to exercise this option during the tenure of the loan. Also, the loan borrowers should be given the option of extending EMI or loan tenure or both.

Customers get permission to partially pay the loan

It has been said in the notification of RBI that the customers should be allowed to repay the loan in full or in part before the time. This facility should be available to them at any time during the tenure of the loan. In the monetary policy review presented last week, the RBI had talked about allowing borrowers to opt for a fixed interest rate from a variable (floating) interest rate. Reserve Bank Governor Shaktikanta Das had said that a new structure is being prepared for this. Under this, banks will have to give clear information about the loan period and monthly installment (EMI) to the borrowers.

Can’t take penalty interest if there is a delay in paying EMI

RBI has said that banks or financial institutions cannot charge penal interest for late payment of EMIs in loan accounts. RBI has said in its circular that no interest will be charged on such fines. The Reserve Bank has instructed that banks should not make penal interest a means of earning from interest. In its notification, the Reserve Bank has set rules for banks regarding non-compliance and penalty in loan accounts.

What does RBI say

• If penalty has been charged on any loan account, it should be in the form of penal charge. It should not be in the form of penal interest, which gets added to the loan interest.

• Banks and lending institutions are not permitted to introduce any additional component charged on interest.

• Regular Entities will have to frame a Board approved policy on Penal Charges or Equalization Charges on Loans (by whatever name called).

• The amount of penal charge being levied should be reasonable and commensurate with the non-compliance of the loan account. Banks cannot discriminate against any particular loan/product category.

• RBI has said that the penalty imposed on personal loan borrowers cannot be more than the penalty imposed on non-individual borrowers.

• In the loan agreement, banks will have to clearly tell the amount of penal charge and the reason for its imposition. Apart from this, interest rates and services will also be shown on the website of the banks.

• Any reminder sent to customers regarding non-compliance would be required to mention ‘penalty’.

• These instructions will be applicable from 1 January 2024. Banks may make necessary changes in their policy framework and implement the instructions in respect of all new loans taken/renewed from the effective date.

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