RBI’s revised fair lending practice norms to come into effect from April 1, check latest details

The Reserve Bank on Monday said the revised fair lending practice, which prohibits banks and NBFCs from using punitive charges on loan defaults as a revenue enhancement tool, will come into effect from April 1.

Expressing apprehension about banks and non-banking financial companies (NBFCs) using penal interest as a means of revenue generation, the RBI changed the norms on August 18 last year. Under the revised guidelines, lenders are now allowed to levy only “reasonable” penal charges in case of default in loan repayment.

Banks, NBFCs and other entities regulated by the RBI were given an extension of three months till April to implement the revised norms.

In a set of frequently asked questions (FAQs), the RBI on Monday said that even in the case of existing loans, the instructions will come into effect from April 1, 2024 and ensure transition to the new penalty fee regime. On the next review/renewal date falling on or after April 1, 2024, but not later than June 30, 2024.

On whether the August 2023 guidelines will also be applicable in case of default in repayment by the borrower, the FAQ states that default in repayment by the borrower is also non-compliance of material terms and conditions of the loan repayment agreement by the borrower and such default Penalty for, if imposed, can be imposed only in the form of penal fee and not in the form of penal interest.

“Such penal charges will be reasonable and will be levied by the lenders only on the default amount in a non-discriminatory manner as per their board approved policy. Further, it should be ensured that there is no capitalization of penal charges – no additional interest is calculated on such charges,” he said.

The central bank further said that although no upper limit/limit for penal charges has been prescribed in the August 2023 circular, regulated entities (REs) should keep in mind while formulating their board-approved policy on penal charges that What is the intention of imposing penalties? The charges are essentially to instill a sense of loan discipline and such charges are not to be used as a “revenue enhancing tool”.

“Accordingly, the quantum of penal charge should be ‘reasonable’ and ‘commensurate’ with the non-compliance with the material terms and conditions of the loan agreement.”

The RBI instructions do not apply to credit cards, external commercial borrowings, trade credit and structured obligations, which fall under product-specific instructions.

(With PTI inputs)