RBI bars banks from levying penal interest
Instead, allows lenders to impose ‘reasonable’ penal charges; Banks can’t use penalties imposed on loan defaulters for raising funds
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Mumbai Concerned over the practice of banks and Non-Banking Financial Companies (NBFCs) using penal interest as a revenue enhancement tool, the Reserve Bank on Friday came out with modified norms, under which lenders would be able to levy only reasonable’ penal charges in case of default in repayment of loans. Generally, penal interest is added to the rate of interest charged on the advances.
The banks and other lending institutions will not be allowed to levy penal interest with effect from January 1, 2024, the RBI said in its notification on ‘Fair Lending Practice-Penal Charges in Loan Accounts’.
“Penalty, if charged, for non-compliance of material terms and conditions of loan contract by the borrower shall be treated as ‘penal charges’ and shall not be ‘penal interest’.
