Banks Request RBI Approval To Postpone Penal Interest Guideline By 3 Months
Indian banks have approached the Reserve Bank of India (RBI) to defer guidelines prohibiting the imposition of penal interest rates on non-compliant borrowers for three months, pushing the implementation to the next financial year. The RBI directive, issued in August, mandates banks to apply charges instead of increasing interest rates for borrowers failing to meet loan contract terms from 1 January 2024.
Typically, banks raise interest rates by 2-3 per cent or more for non-compliant borrowers, seen as a revenue booster. However, the RBI considers this practice excessive and has directed banks to apply only "reasonable" penal charges for defaulting on loan repayments.
Lenders argue that penal rates enhance credit discipline but require time to adapt internal systems to comply. Some suggest imposing penalties solely through additional interest to reinforce credit discipline.
The RBI's notification on "Fair Lending Practice – Penal Charges in Loan Accounts" mandates banks to follow the new guidelines from January. Banks seek an extension to the following financial year starting 1 April 2024.
The RBI's August guidelines highlighted varied practices in penal interest, leading to customer grievances. Banks seek clarity on penal charges for stressed accounts and express concerns about GST levies on penalties. They propose GST liability for banks upon realisation, currently subject to ambiguity.
While acknowledging the RBI's customer protection intent, a public sector bank executive opined that a one-time penalty might not effectively deter non-compliance.
