RBI’s New Guidelines: Relief to Loan Customers with Fair Practices in Interest Charging

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The Reserve Bank of India (RBI) has issued guidelines called the Fair Practices Code for lenders, including banks and non-banking financial companies, to ensure fairness and transparency in charging interest on loans. During examinations, the RBI found some lenders engaging in unfair practices, such as charging interest from the date of loan sanction instead of the date of actual disbursement, or charging interest for the entire month even if the loan was repaid or disbursed during the month. These practices are not fair to customers. The RBI has directed all lenders to review their practices and make necessary changes to ensure fairness and transparency.

Official Guideline issued by RBI for Big relief to Customers and Borrowers who have take loan and paying EMIs

DoS.CO.PPG.SEC.1/11.01.005/2024-25 April 29, 2024

All Commercial Banks (including Small Finance Banks, Local Area Banks and
Regional Rural Banks) excluding Payments Banks
All Primary (Urban) Co-operative Banks/ State Co-operative Banks/
District Central Co-operative Banks
All Non-Banking Financial Companies (including Microfinance Institutions and
Housing Finance Companies)

Fair Practices Code for Lenders – Charging of Interest

The guidelines on Fair Practices Code issued to various Regulated Entities (REs) since 2003, inter-alia, advocate fairness and transparency in charging of interest by the lenders, while providing adequate freedom to REs as regards their loan pricing policy.

2. During the course of the onsite examination of REs for the period ended March 31, 2023, the Reserve Bank came across instances of lenders resorting to certain unfair practices in charging of interest. Some of the unfair practices observed are briefly explained below:

  1. Charging of interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer. Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later.

Example: Rajesh applied for a loan of ₹50,000 from Bank ABC. After the loan was sanctioned on June 1, 2023, the bank started charging interest based on the sanctioned amount, even though the funds were not disbursed until June 10. As a result, Rajesh had to pay interest for the entire duration from June 1 to June 10, despite not receiving the loan amount until later. This practice of charging interest from the date of loan sanction, rather than from the actual disbursement date, disadvantaged Rajesh and was not aligned with fair lending practices.

b. In the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.

Example: Priya took out a loan from XYZ Credit Cooperative on September 15, 2020, and repaid it in full on September 10, 2024. XYZ Credit Cooperative charged Priya interest for the entire month of September. This meant that Priya had to pay more interest than warranted, considering the actual tenure for which she utilized the loan. This practice of charging full-month interest, was not fair to Priya as a borrower.

c. In some cases, it was observed that REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.

Example: Rahul decided to prepay a portion of his loan from PQR Bank by making an advanced payment of two instalments. However, PQR Bank continued to calculate interest based on the original loan amount, without adjusting for the reduced outstanding balance resulting from Rahul’s advanced payments. As a result, Rahul was charged interest on the full loan amount, despite reducing his principal outstanding. This practice of collecting advanced instalments but not adjusting the interest calculation accordingly was unfair to Rahul and led to unnecessary interest charges.

3. These and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers. These are matters of serious concern to the Reserve Bank. Wherever such practices have come to light, RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers. REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal.

4. Therefore, in the interest of fairness and transparency, all REs are directed to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system level changes, as may be necessary, to address the issues highlighted above.

5. This circular takes immediate effect i.e. 29th April 2024

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Pooja Gupta

CA Pooja Gupta (CA, ISA, M.com) having 15 years of experience. Educator and Digital Creator

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CA Pooja Gupta (CA, ISA, M.com) having 15 years of experience. Educator and Digital Creator

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