RBI defers norms on penal charges to April 1

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The Reserve Bank of  India on Friday gave three more months up till April 1, 2024,  to banks and NBFCs to implement the new norms for penal charges in loan accounts, as part of fair lending practice.

In August this year,  it had issued a circular on the issue and it was to come into effect from January 1, 2024. “However, considering that certain clarifications and additional time has been sought by some regulated entities (REs) to reconfigure their internal systems and operationalize the circular, it has been decided to extend the timeline for implementation of the instructions by three months,” the RBI said in a statement.

Accordingly, banks and NBFCs have been asked to ensure the implementation of these instructions on all fresh loans from April 1, 2024 onwards.

In the case of existing loans, the RBI said the switchover to new penal charges regime should be ensured on the next review/ renewal date falling on or after April 1, 2024, but not later than June 30, 2024.

The RBI August 18 had modified norms, under which lenders were allowed to levy only “reasonable” penal charges in case of default in repayment of loans.

The banks and other lending institutions will not be allowed to levy penal interest with effect from January 1, 2024, it had said. “Penalty, if charged, for non-compliance of material terms and conditions of loan contract by the borrower shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances,” the August circular said. It further said the quantum of penal charges “shall be reasonable and commensurate with the noncompliance” of material terms and conditions of loan contract without being discriminatory within a particular loan/product category. Also, there should be no capitalisation of penal charges — no further interest computed on such charges. The instructions do not apply to credit cards, external commercial borrowings, trade credits and structured obligations which are covered under product-specific directions.

(With inputs from PTI)