The Reserve Bank of India (RBI) has released a set of clarifications to clear the air on penal charges on loan accounts.
Notably, the RBI had released guidelines on August 18, 2023 which stipulated that the penalty for non-compliance will be treated as penal charges and not in the form of penal interest. Also, there will be no further interest computed on such charges.
The key rationale was that the intent of levying penal charges is meant to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest.
Earlier, the new rules were set to come into force from Jan 1, 2024, but RBI — via a circular on Dec 29, 2023 — deferred the implementation by another three months to April 1, 2024.
These are the queries the RBI circular has answered:
When will the switchover come into place?
The switchover to new penal charges regime for existing loans will be ensured on the renewal date falling on or after April 1, 2024 but not later than June 30 this year.
These guidelines would be applicable in case of non-compliance of material terms and conditions, so what could be termed as “material terms and conditions”?
The material terms and conditions will be defined as per the credit policy of the bank and they may vary from one category of loan to another, and from bank to bank based on their own assessment.
When earlier penal charges are not paid, can bank impose fresh penal charges?
No, additional penal charges cannot be levied on the earlier outstanding amount of penal charges.
Do these rules apply to bank’s overdraft facilities and cash credit?
Yes, the instructions apply to all credit facilities except those specifically exempted in the circular.
Is there any upper limit on the penal charges?
On this, RBI has clarified that there is no upper limit or cap for penal charges. The banks, while formulating their policy, should keep in mind that the intent behind levying penal charges is to inculcate a sense of credit discipline and not to increase their revenue.
Therefore, the quantum of penal charges need to be ‘reasonable’ and ‘commensurate’ with the non-compliance of loan contract.
Will these instructions be applicable in case of securitisation and co-lending portfolios?
Yes, these instructions will be applicable in case of securitisation and co-lending portfolios.
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Published: 17 Jan 2024, 04:46 PM IST
