Non-standard practices of charging interest by lenders: RBI directs corrective action

The Reserve Bank of India today, in its circular informed that during the onsite examination of Regulated Entities (Banks, NBFCs, and FIs) for the period ended March 31, 2023; it came across instances of lenders resorting to certain unfair practices in charging of interest.

Some of the unfair practices noticed by the Central Bank 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.
2. 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.
3. In some cases, it was observed that REs were collecting one or more installments in advance but reckoning the full loan amount for charging interest.

“These and other such non-standard practices of charging interest is not in consonance with the spirit of fairness and transparency while dealing with customers”, said RBI. “These are matters of serious concern to the Reserve Bank”, it added.

RBI through its supervisory team advised the errant entities to refund such excess interest and other charges to customers, wherever such practices have come to light, said the circular.

Regulated Entities (Res) are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal.

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