‘No further interest on penal charges’: RBI issues new guidelines for loans.

RBI’s new instructions on penal charges on loans shall come into effect from January 1, 2024.

The Reserve Bank of India (RBI) on Friday issued new guidelines for the levy of penal rates of interest on loan accounts. Under the new guidelines, the penalty for non-compliance with the terms of the loan by the borrower shall be treated as “penal charges” and not as “penal interest” that is added to the rate of interest charged on the advances.

The guidelines titled “Fair Lending Practice – Penal Charges in Loan Accounts” also state that there shall be no capitalisation of penal charges. This means that no further interest will be computed on such charges.

For example, say the borrower’s instalment payment for the month of August is Rs 1,000 at a 10 per cent interest rate. The default on making a timely instalment payment would say, subject them to an additional or penal interest of 24 per cent per annum. It would amount to 2 per cent per month and will be over and above the 10 per cent already payable.

Now, the guidelines state that “penal interest” of 2 per cent will be replaced with “penal charge”, with no additional component to the rate of interest.

RBI’s new instructions on penal charges on loans shall come into effect from January 1, 2024.