Banks Seek 3-Month Extension From RBI On Guideline Against Penal Interest Rates
Banks have once again approached the Reserve Bank of India (RBI), requesting a three-month extension to implement a guideline preventing them from imposing penal interest rates on non-compliant borrowers, pushing the deadline to the next financial year.
The RBI issued the guideline in August, mandating banks to levy charges without raising the interest rate for borrowers failing to meet loan contract terms and conditions from 1 January, 2024.
Lenders, in a recent representation to the RBI, argued that penal interest rates for late payments contribute to better credit discipline. They also mentioned the need for time to reconfigure internal systems in case of changes in penal charges.
An anonymous official from a leading public sector bank revealed the need for additional time to align internal systems with the guidelines.
Some banks advocate that penalties should be imposed only through additional interest, as it promotes better credit discipline. Currently, banks increase the interest rate for non-compliant borrowers by 2 to 3 percent or more on a case-by-case basis.
The RBI, viewing penal charges as a revenue enhancement tool rather than a penalty, directed banks to impose only reasonable penal charges in case of loan repayment defaults. The revised guidelines on 'Fair Lending Practice - Penal Charges in Loan Accounts' were to be implemented from January, but banks are now requesting an extension to the next fiscal year.
The regulator, in its August announcement, mentioned supervisory reviews revealing divergent practices in penal interest or charges, leading to disputes and customer grievances. Banks are also seeking clarity on penal charges for stressed accounts due to uncertainty in recovery, according to sources familiar with the matter.
