What Are RBI's New Guidelines For Fair Lending Practices By Banks | Explained

The Reserve Bank of India (RBI) has issued comprehensive guidelines for penal charges in loan accounts to promote fairness, transparency and accountability in the lending practices of all financial institutions.

RBI’s new guidelines will be applicable to all commercial banks, including Small Finance Banks, Local Area Banks, and Regional Rural Banks, as well as Primary (Urban) Co-operative Banks, Non-Banking Financial Companies (NBFCs), and All India Financial Institutions.

Also read: Abu Dhabi’s TAQA To Invest Over $2 Billion In Adani Energy Solutions; Details Here

This move by RBI would ensure that borrowers are treated fairly and also addresses customer grievances which arise due to divergent practices in the imposition of penal charges.

The guidelines also emphasize that any penalty imposed for non-compliance with material terms and conditions of a loan contract shall be treated as 'penal charges' rather than 'penal interest.' This means that penal charges shouldn’t be added to the rate of interest charged on the advances and no further interest should be computed on such charges.

The guidelines also say that the penal charges should be reasonable and commensurate with the level of non-compliance. The charges should be clearly disclosed to the customers in the loan agreement. It should also be prominently displayed on the financial institution's website under the section dedicated to interest rates and service charges.

RBI guidelines also urged the financial institutions to formulate a Board-approved policy on penal charges or similar charges on loans. The policy should outline the rationale for the charges, the criteria for determining their quantum, and their applicability across different loan/product categories.

It also ensures that the penal charges shouldn't be higher than those applicable to non-individual borrowers facing similar non-compliance. It also highlighted that the levy of penal charges and the reasons for their imposition should also be clearly communicated.

Also read: Concord Biotech IPO Lists At 21% Premium Over IPO Price; Know New Share Price And Other Details

These instructions will come into effect from January 1, 2024. Financial institutions are expected to revise their policy frameworks accordingly and ensure the implementation of the new guidelines for all fresh loans availed or renewed from the effective date.

RBI further informed that existing loans will transition to the new penal charges regime on the next review or renewal date, or within six months of the effective date of these instructions, whichever is earlier.