RBI Extends Deadline For New Penal Charges Regime Till 1 April 2024
The Reserve Bank of India (RBI) has extended the deadline for the implementation of a new penal charges regime by three months from 1 January 2024 to 1 April 2024. This extension applies to new loans, while existing loans must be switched to the new penal regime by 30 June 2024.
It is important to note that the banking regulator has issued detailed guidelines to prevent banks from charging a penal rate of interest in case of borrower defaults.
According to a recent circular, regulated entities (such as banks) have been instructed to extend the timeline for implementation of certain regulations by three months. As a result, these entities are required to ensure that the instructions are implemented for all fresh loans availed from 1 April 2024 onwards.
For existing loans, the switch to the new penal charges regime must be made on the next review or renewal date falling on or after April 2024, but no later than 30 June 2024.
The regulator issued guidelines on 18 August 2023, as they noticed that banks were using penal charges as a way to generate revenue, rather than encouraging credit discipline among borrowers, which was the primary goal.
As per the RBI guidelines, if a penalty is charged for non-compliance, it will be treated as penal charges instead of penal interest and there will be no capitalisation of penal charges. Therefore, no further interest will be calculated on such charges.
The guidelines also stipulated that the quantum of penal charges would be reasonable and commensurate with the non-compliance without being discriminatory within a particular loan category.
The guidelines state that for loans sanctioned to individuals for non-business purposes, the penal charges should be equivalent to those applied to non-individual borrowers for similar non-compliance. To prevent banks from setting arbitrary rates of interest, they must adhere to a board-approved policy on penal charges for loans with similar charges.
It is also worth noting that the instructions provided here do not pertain to credit cards that are covered by specific product directions. Additionally, as mentioned earlier, these guidelines were originally supposed to be implemented from 1 January 2024, but now they have been postponed until 31 March 2024.
