Executive Summary:
This Reserve Bank of India (RBI) circular addresses concerns about divergent practices in levying penal charges on loans, aiming to ensure fairness and transparency. It mandates that penalties for non-compliance with loan terms be treated as penal charges, not penal interest, and outlines guidelines for Regulated Entities (REs) regarding policy formulation, disclosure, and quantum of such charges. The instructions are effective from January 1, 2024, requiring REs to revise their policies and implement the changes for new and existing loans.
Key Points / Main Content:
Penal Charges Guidelines:
* Penalties for non-compliance with loan terms must be treated as penal charges, not as penal interest added to the loan's interest rate.
* Capitalization of penal charges is prohibited (no further interest can be computed on these charges), but normal compounding of interest is unaffected.
* REs cannot add any additional component to the interest rate.
Policy and Implementation:
* REs must formulate a Board-approved policy on penal charges.
* Penal charges must be reasonable, commensurate with the non-compliance, and non-discriminatory within a loan product category.
* Penal charges for individual borrowers (non-business purposes) cannot exceed those for non-individual borrowers for similar non-compliance.
Disclosure and Communication:
* The amount and reason for penal charges must be clearly disclosed in the loan agreement, Key Fact Statement (KFS), and on the RE's website.
* Borrowers must be informed of applicable penal charges in reminders for non-compliance and upon levy of such charges.
Effective Date and Transition:
* These instructions are effective from January 1, 2024.
* For new/renewed loans from the effective date, the instructions apply immediately.
* For existing loans, switch to the new regime at the next review/renewal or within six months from the effective date, whichever is earlier.
Scope and Authority:
* The instructions are issued under specific sections of the Banking Regulation Act, the Reserve Bank of India Act, and the National Housing Bank Act.
* These instructions do not apply to Credit Cards, External Commercial Borrowings, Trade Credits, and Structured Obligations.
Amendments to Master Directions:
* Amendments are made to Master Directions regarding interest rates on advances and regulations for Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs) and Urban Co-operative Banks (UCBs), to reflect the new guidelines on penal charges.
Impact Analysis
Regulated Entities (REs):
* Impact: REs must revise their existing policies on penal charges to align with the new guidelines, ensuring fairness, transparency, and non-discrimination. They need to update loan agreements, Key Fact Statements, and website disclosures.
* Action Required: Formulate a Board-approved policy on penal charges, revise systems to avoid capitalization of penal charges, ensure compliance with disclosure requirements, and implement changes by January 1, 2024, for new loans and transition existing loans within six months.
Borrowers:
* Impact: Borrowers will benefit from greater transparency and fairness in the application of penal charges, with clearer communication regarding the amount and reasons for such charges. Individual borrowers for non-business purposes are protected from higher penal charges compared to non-individual borrowers.
* Action Required: Review loan agreements to understand the revised penal charge policies and monitor communications from REs regarding non-compliance and associated charges.
Reserve Bank of India (RBI):
* Impact: The RBI aims to promote better lending practices and reduce customer grievances related to penal charges, enhancing the integrity and transparency of the financial system.
* Action Required: Update relevant Master Directions and Circulars and supervise REs' compliance with the new guidelines.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector and issuing guidelines on financial matters.
Commercial Banks: Includes Small Finance Banks, Local Area Banks and Regional Rural Banks, excluding Payments Banks
Primary Urban Cooperative Banks: A type of cooperative bank that operates in urban areas.
NBFCs: Non-Banking Financial Companies, including HFCs (Housing Finance Companies) and All India Financial Institutions.
EXIM Bank: Export-Import Bank of India, a financial institution that facilitates international trade.
NABARD: National Bank for Agriculture and Rural Development, an apex development bank in India.
National Housing Bank Act, 1987: An act of parliament to establish National Housing Bank as the principal agency to promote housing finance institutions.
Mumbai, Maharashtra: City in India, location of Reserve Bank of India Central office
भारतीय ररज़र्व बैंक
RESERVE BANK OF INDIA
RBI/2023-24/53
DoR.MCS.REC.28/01.01.001/2023-24 August 18, 2023
All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional
Rural Banks, excluding Payments Banks)
All Primary (Urban) Co-operative Banks
All NBFCs (including HFCs) and
All India Financial Institutions (EXIM Bank, NABARD, NHB, SIDBI and NaBFID)
Madam / Dear Sir,
Fair Lending Practice - Penal Charges in Loan Accounts
Reserve Bank has issued various guidelines to the Regulated Entities (REs) to ensure
reasonableness and transparency in disclosure of penal interest. Under the extant
guidelines, lending institutions have the operational autonomy to formulate Board
approved policy for levy of penal rates of interest. It has been observed that many REs
use penal rates of interest, over and above the applicable interest rates, in case of
defaults / non-compliance by the borrower with the terms on which credit facilities were
sanctioned.
2. The intent of levying penal interest/charges is essentially to inculcate a sense of credit
discipline and such charges are not meant to be used as a revenue enhancement tool
over and above the contracted rate of interest. However, supervisory reviews have
indicated divergent practices amongst the REs with regard to levy of penal
interest/charges leading to customer grievances and disputes.
3. On a review of the practices followed by REs for charging penal interest/charges on
loans, the following instructions are issued for adoption.
(i) 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.
There shall be no capitalisation of penal charges i.e., no further interest computed on
विवियमि विभाग, केंद्रीय कायाालय, 12िी ींऔर 13िी ींमींव़िल, केंद्रीय कायाालय भिि, शहीद भगत व ींह मागा, म ींबई 400001
टेलीफोि /Tel No: 22601000 फैक्स/ Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
Department of Regulation, Central Office, 12th & 13th Floor, Central Office Building, Shaheed Bhagat Singh Marg, Mumbai – 400001
Tel No: 22601000 Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
बैंक वहींदी में पत्राचार का स्वागत करता है
Caution: RBI never sends mails, SMSs or makes calls asking for personal information like bank account details, passwords, etc. It never keeps or
offers funds to anyone. Please do not respond in any manner to such offers.such charges. However, this will not affect the normal procedures for compounding of
interest in the loan account.
(ii) The REs shall not introduce any additional component to the rate of interest and
ensure compliance to these guidelines in both letter and spirit.
(iii) The REs shall formulate a Board approved policy on penal charges or similar charges
on loans, by whatever name called.
(iv) The quantum of penal charges shall be reasonable and commensurate with the non-
compliance of material terms and conditions of loan contract without being discriminatory
within a particular loan / product category.
(v) The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes
other than business’, shall not be higher than the penal charges applicable to non-
individual borrowers for similar non-compliance of material terms and conditions.
(vi) The quantum and reason for penal charges shall be clearly disclosed by REs to the
customers in the loan agreement and most important terms & conditions / Key Fact
Statement (KFS) as applicable, in addition to being displayed on REs website under
Interest rates and Service Charges.
(vii) Whenever reminders for non-compliance of material terms and conditions of loan are
sent to borrowers, the applicable penal charges shall be communicated. Further, any
instance of levy of penal charges and the reason therefor shall also be communicated.
(viii) These instructions shall come into effect from January 1, 2024. REs may carry out
appropriate revisions in their policy framework and ensure implementation of the
instructions in respect of all the fresh loans availed/ renewed from the effective date. In
the case of existing loans, the switchover to new penal charges regime shall be ensured
on next review or renewal date or six months from the effective date of this circular,
whichever is earlier.
4. The above instructions are issued under sections 21, 35A and 56 of the Banking
Regulation Act, 1949, sections 45JA, 45L and 45M of the Reserve Bank of India Act,
1934, and section 30A of the National Housing Bank Act, 1987 and shall be updated in
2the relevant Master Directions / Master Circulars of the applicable REs. The list of
amendments to the Master Directions / Master Circulars has been provided in the Annex.
5. These instructions shall, however, not apply to Credit Cards, External Commercial
Borrowings, Trade Credits and Structured Obligations which are covered under product
specific directions.
Yours faithfully,
(Santosh Kumar Panigrahy)
Chief General Manager
Encl: As above
3Annex
I. Amendments to the relevant Master Directions
Para Existing Section Amended Section
No.
A. Master Direction – Reserve Bank of India (Interest Rate on Advances) Directions, 2016
dated March 03, 2016
5 Banks shall formulate a deleted
Board approved policy for
charging penal interest on
advances which shall be
fair and transparent. The
rate of penal interest shall
be decided after taking
into account incentive to
service the debt and due
regard to genuine
difficulties of customers.
Provided that no penal deleted
interest shall be charged
on advances mentioned in
the circular
RPCD.Plan.BC.15/04.09.
01/2001-02 dated August
17, 2001, as amended
from time to time.
B. Master Direction – Non-Banking Financial Company – Non-Systemically Important
Non-Deposit taking Company (Reserve Bank) Directions, 2016 dated September 1, 2016
29 Applicable NBFCs shall Applicable NBFCs shall convey in writing to the
convey in writing to the borrower in the vernacular language as understood
borrower in the vernacular by the borrower by means of sanction letter or
language as understood otherwise, the amount of loan sanctioned along with
by the borrower by means the terms and conditions including annualised rate of
of sanction letter or interest and method of application thereof and keep
otherwise, the amount of the acceptance of these terms and conditions by the
loan sanctioned along borrower on its record. As complaints received
with the terms and against NBFCs generally pertain to charging of high
conditions including interest / penal charges, applicable NBFCs shall
annualised rate of interest mention the penalties charged for late repayment in
and method of application bold in the loan agreement.
thereof and keep the
acceptance of these
terms and conditions by
the borrower on its record.
4As complaints received
against NBFCs generally
pertain to charging of high
interest / penal interest,
applicable NBFCs shall
mention the penal interest
charged for late
repayment in bold in the
loan agreement.
(New section inserted) Penalty, if charged, for non-compliance of material
Penal Charges in Loan terms and conditions of loan contract by the
Accounts 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. There shall be no capitalisation of penal
charges i.e., no further interest computed on such
charges. However, this will not affect the normal
procedures for compounding of interest in the loan
account.
The REs shall not introduce any additional
component to the rate of interest and ensure
compliance to these guidelines in both letter and
spirit.
The REs shall formulate a Board approved policy on
penal charges or similar charges on loans, by
whatever name called.
The quantum of penal charges shall be reasonable
and commensurate with the non-compliance of
material terms and conditions of loan contract
without being discriminatory within a particular loan /
product category.
The penal charges in case of loans sanctioned to
‘individual borrowers, for purposes other than
business’, shall not be higher than the penal charges
applicable to non-individual borrowers for similar
non-compliance of material terms and conditions.
The quantum and reason for penal charges shall be
clearly disclosed by REs to the customers in the loan
agreement and most important terms & conditions /
5Key Fact Statement (KFS) as applicable, in addition
to being displayed on REs website under Interest
rates and Service Charges.
Whenever reminders for non-compliance of material
terms and conditions of loan are sent to borrowers,
the applicable penal charges shall be
communicated. Further, any instance of levy of
penal charges and the reason therefor shall also be
communicated.
These instructions shall come into effect from
January 1, 2024. REs may carry out appropriate
revisions in their policy framework and ensure
implementation of the instructions in respect of all
the fresh loans availed/ renewed from the effective
date. In the case of existing loans, the switchover to
new penal charges regime shall be ensured on next
review or renewal date or six months from the
effective date of these instructions, whichever is
earlier.
C. Master Direction - Non-Banking Financial Company -Systemically Important Non-
Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016
dated September 1, 2016
29 Applicable NBFCs shall Applicable NBFCs shall convey in writing to the
convey in writing to the borrower in the vernacular language as understood
borrower in the vernacular by the borrower by means of sanction letter or
language as understood otherwise, the amount of loan sanctioned along with
by the borrower by means the terms and conditions including annualised rate of
of sanction letter or interest and method of application thereof and keep
otherwise, the amount of the acceptance of these terms and conditions by the
loan sanctioned along borrower on its record. As complaints received
with the terms and against NBFCs generally pertain to charging of high
conditions including interest / penal charges, applicable NBFCs shall
annualised rate of interest mention the penalties charged for late repayment in
and method of application bold in the loan agreement.
thereof and keep the
acceptance of these
terms and conditions by
the borrower on its record.
As complaints received
against NBFCs generally
pertain to charging of high
6interest / penal interest,
applicable NBFCs shall
mention the penal interest
charged for late
repayment in bold in the
loan agreement.
(New section inserted) Penalty, if charged, for non-compliance of material
Penal Charges in Loan terms and conditions of loan contract by the
Accounts 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. There shall be no capitalisation of penal
charges i.e., no further interest computed on such
charges. However, this will not affect the normal
procedures for compounding of interest in the loan
account.
The REs shall not introduce any additional
component to the rate of interest and ensure
compliance to these guidelines in both letter and
spirit.
The REs shall formulate a Board approved policy on
penal charges or similar charges on loans, by
whatever name called.
The quantum of penal charges shall be reasonable
and commensurate with the non-compliance of
material terms and conditions of loan contract
without being discriminatory within a particular loan /
product category.
The penal charges in case of loans sanctioned to
‘individual borrowers, for purposes other than
business’, shall not be higher than the penal charges
applicable to non-individual borrowers for similar
non-compliance of material terms and conditions.
The quantum and reason for penal charges shall be
clearly disclosed by REs to the customers in the loan
agreement and most important terms & conditions /
Key Fact Statement (KFS) as applicable, in addition
to being displayed on REs website under Interest
rates and Service Charges.
7Whenever reminders for non-compliance of material
terms and conditions of loan are sent to borrowers,
the applicable penal charges shall be
communicated. Further, any instance of levy of
penal charges and the reason therefor shall also be
communicated.
These instructions shall come into effect from
January 1, 2024. REs may carry out appropriate
revisions in their policy framework and ensure
implementation of the instructions in respect of all
the fresh loans availed/ renewed from the effective
date. In the case of existing loans, the switchover to
new penal charges regime shall be ensured on next
review or renewal date or six months from the
effective date of these instructions, whichever is
earlier.
D. Master Direction - Non-Banking Financial Company – Housing Finance Company
(Reserve Bank) Directions, 2021 dated February 17, 2021
74.2 HFCs shall transparently HFCs shall transparently disclose to the borrower all
disclose to the borrower information about fees/ charges payable for
all information about fees/ processing the loan application, the amount of fees
charges payable for refundable if loan amount is not sanctioned/
processing the loan disbursed, pre-payment options and charges, if any,
application, the amount of penal charges for delayed repayment, if any,
fees refundable if loan conversion charges for switching loan from fixed to
amount is not sanctioned/ floating rates or vice-versa, existence of any interest
disbursed, pre-payment reset clause and any other matter which affects the
options and charges, if interest of the borrower. In other words, HFCs must
any, penal interest/ disclose ‘all in cost’ inclusive of all charges involved
penalty for delayed in processing/ sanctioning of loan application in a
repayment, if any, transparent manner. It should also be ensured that
conversion charges for such charges/ fees are non-discriminatory.
switching loan from fixed
to floating rates or vice-
versa, existence of any
interest reset clause and
any other matter which
affects the interest of the
borrower. In other words,
HFCs must disclose ‘all in
cost’ inclusive of all
8charges involved in
processing/ sanctioning of
loan application in a
transparent manner. It
should also be ensured
that such charges/ fees
are non-discriminatory.
75.2 HFCs shall convey in HFCs shall convey in writing to the borrower in the
writing to the borrower in vernacular language or a language as understood by
the vernacular language the borrower by means of sanction letter or
or a language as otherwise, the amount of loan sanctioned along with
understood by the all terms and conditions including annualized rate of
borrower by means of interest, method of application, EMI Structure,
sanction letter or prepayment charges, penal charges (if any) and
otherwise, the amount of keep the written acceptance of these terms and
loan sanctioned along conditions by the borrower on its record.
with all terms and
conditions including
annualized rate of
interest, method of
application, EMI
Structure, prepayment
charges, penal interest (if
any) and keep the written
acceptance of these
terms and conditions by
the borrower on its record.
76.2 The HFCs shall give The HFCs shall give notice to the borrower in the
notice to the borrower in vernacular language or a language as understood by
the vernacular language the borrower of any change in the terms and
or a language as conditions including disbursement schedule, interest
understood by the rates, penal charges (if any), service charges,
borrower of any change in prepayment charges, other applicable fee/ charges
the terms and conditions etc. HFCs should also ensure that changes in
including disbursement interest rates and charges are effected only
schedule, interest rates, prospectively. A suitable condition in this regard
penal interest (if any), should be incorporated in the loan agreement.
service charges,
prepayment charges,
other applicable fee/
charges etc. HFCs should
also ensure that changes
in interest rates and
charges are effected only
9prospectively. A suitable
condition in this regard
should be incorporated in
the loan agreement.
80.1 The Board of each HFC The Board of each HFC shall adopt an interest rate
shall adopt an interest model taking into account relevant factors such as
rate model taking into cost of funds, margin and risk premium and
account relevant factors determine the rate of interest to be charged for loans
such as cost of funds, and advances. The rate of interest and the approach
margin and risk premium for gradation of risk and rationale for charging
and determine the rate of different rate of interest to different categories of
interest to be charged for borrowers shall be disclosed to the borrower or
loans and advances. The customer in the application form and communicated
rate of interest and the explicitly in the sanction letter. The Board of the HFC
approach for gradation of shall also have clearly laid down policy for penal
risk and rationale for charges (if any).
charging different rate of
interest to different
categories of borrowers
shall be disclosed to the
borrower or customer in
the application form and
communicated explicitly in
the sanction letter. The
Board of the HFC shall
also have clearly laid
down policy for penal
interest/ charges (if any).
80.3 The rate of interest and The rate of interest must be annualised rate so that
penal interest (if any) the borrower is aware of the exact rates that would
must be annualised rate be charged to the account.
so that the borrower is
aware of the exact rates
that would be charged to
the account
81 Though interest rates are Though interest rates are not regulated by the Bank,
not regulated by the Bank, rates of interest beyond a certain level may be seen
rates of interest beyond a to be excessive and can neither be sustainable nor
certain level may be seen be conforming to normal financial practice. HFCs
to be excessive and can shall lay out appropriate internal principles and
neither be sustainable nor procedures in determining interest rates and
be conforming to normal processing and other charges (including penal
financial practice. HFCs charges, if any). In this regard the directions in the
shall lay out appropriate Fair Practices Code about transparency in respect of
10internal principles and terms and conditions of the loans are to be kept in
procedures in determining view. HFCs are also advised to put in place an
interest rates and internal mechanism to monitor the process and the
processing and other operations so as to ensure adequate transparency
charges (including penal in communications with the borrowers.
interest, if any). In this
regard the directions in
the Fair Practices Code
about transparency in
respect of terms and
conditions of the loans are
to be kept in view. HFCs
are also advised to put in
place an internal
mechanism to monitor the
process and the
operations so as to
ensure adequate
transparency in
communications with the
borrowers.
(New section inserted) Penalty, if charged, for non-compliance of material
Penal Charges in Loan terms and conditions of loan contract by the
Accounts 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. There shall be no capitalisation of penal
charges i.e., no further interest computed on such
charges. However, this will not affect the normal
procedures for compounding of interest in the loan
account.
The REs shall not introduce any additional
component to the rate of interest and ensure
compliance to these guidelines in both letter and
spirit.
The REs shall formulate a Board approved policy on
penal charges or similar charges on loans, by
whatever name called.
The quantum of penal charges shall be reasonable
and commensurate with the non-compliance of
material terms and conditions of loan contract
11without being discriminatory within a particular loan /
product category.
The penal charges in case of loans sanctioned to
‘individual borrowers, for purposes other than
business’, shall not be higher than the penal charges
applicable to non-individual borrowers for similar
non-compliance of material terms and conditions.
The quantum and reason for penal charges shall be
clearly disclosed by REs to the customers in the loan
agreement and most important terms & conditions /
Key Fact Statement (KFS) as applicable, in addition
to being displayed on REs website under Interest
rates and Service Charges.
Whenever reminders for non-compliance of material
terms and conditions of loan are sent to borrowers,
the applicable penal charges shall be
communicated. Further, any instance of levy of
penal charges and the reason therefor shall also be
communicated.
These instructions shall come into effect from
January 1, 2024. REs may carry out appropriate
revisions in their policy framework and ensure
implementation of the instructions in respect of all
the fresh loans availed/ renewed from the effective
date. In the case of existing loans, the switchover to
new penal charges regime shall be ensured on next
review or renewal date or six months from the
effective date of these instructions, whichever is
earlier.
82.3 HFCs shall provide HFCs shall provide information on interest rates,
information on interest common fees and charges (including penal charges,
rates, common fees and if any) through putting up notices in their branches;
charges (including penal through telephone or help-lines; on the company’s
interest, if any) through website; through designated staff/ help desk; or
putting up notices in their providing service guide/ tariff schedule.
branches; through
telephone or help-lines;
on the company’s
website; through
designated staff/ help
12desk; or providing service
guide/ tariff schedule.
85.9 Display of various key Display of various key aspect such as service
aspect such as service charges, interest rates, penal charges (if any),
charges, interest rates, services offered, product information, time norms for
Penal interest (if any), various transactions and grievance redressal
services offered, product mechanism, etc. is required to promote transparency
information, time norms in the operations of HFCs. HFCs shall follow the
for various transactions instructions on “Notice Board”, “Booklets/
and grievance redressal Brochures”, “Website”, “Other Modes of Display” and
mechanism, etc. is on “Other Issues” as per Annex XII.
required to promote
transparency in the
operations of HFCs.
HFCs shall follow the
instructions on “Notice
Board”, “Booklets/
Brochures”, “Website”,
“Other Modes of Display”
and on “Other Issues” as
per Annex XII.
II. Instructions in addition to the paragraphs of the related Master Circulars
E. Master Circular- Management of Advances – UCBs dated July 25, 2023
Para Existing Paragraph Additional instructions that shall apply
No.
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. There shall be no capitalisation of penal
charges i.e., no further interest computed on such
charges. However, this will not affect the normal
procedures for compounding of interest in the loan
account.
The REs shall not introduce any additional
component to the rate of interest and ensure
compliance to these guidelines in both letter and
spirit.
13The REs shall formulate a Board approved policy on
penal charges or similar charges on loans, by
whatever name called.
The quantum of penal charges shall be reasonable
and commensurate with the non-compliance of
material terms and conditions of loan contract
without being discriminatory within a particular loan /
product category.
The penal charges in case of loans sanctioned to
‘individual borrowers, for purposes other than
business’, shall not be higher than the penal charges
applicable to non-individual borrowers for similar
non-compliance of material terms and conditions.
The quantum and reason for penal charges shall be
clearly disclosed by REs to the customers in the loan
agreement and most important terms & conditions /
Key Fact Statement (KFS) as applicable, in addition
to being displayed on REs website under Interest
rates and Service Charges.
Whenever reminders for non-compliance of material
terms and conditions of loan are sent to borrowers,
the applicable penal charges shall be
communicated. Further, any instance of levy of
penal charges and the reason therefor shall also be
communicated.
These instructions shall come into effect from
January 1, 2024. REs may carry out appropriate
revisions in their policy framework and ensure
implementation of the instructions in respect of all
the fresh loans availed/ renewed from the effective
date. In the case of existing loans, the switchover to
new penal charges regime shall be ensured on next
review or renewal date or six months from the
effective date of these instructions, whichever is
earlier.
14F. Master Circular - Customer Service in Banks dated July 1, 2015
Para Levy of service charges Penalty, if charged, for non-compliance of material
graph terms and conditions of loan contract by the
6 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. There shall be no capitalisation of penal
charges i.e., no further interest computed on such
charges. However, this will not affect the normal
procedures for compounding of interest in the loan
account.
The REs shall not introduce any additional
component to the rate of interest and ensure
compliance to these guidelines in both letter and
spirit.
The REs shall formulate a Board approved policy on
penal charges or similar charges on loans, by
whatever name called.
The quantum of penal charges shall be reasonable
and commensurate with the non-compliance of
material terms and conditions of loan contract
without being discriminatory within a particular loan /
product category.
The penal charges in case of loans sanctioned to
‘individual borrowers, for purposes other than
business’, shall not be higher than the penal charges
applicable to non-individual borrowers for similar
non-compliance of material terms and conditions.
The quantum and reason for penal charges shall be
clearly disclosed by REs to the customers in the loan
agreement and most important terms & conditions /
Key Fact Statement (KFS) as applicable, in addition
to being displayed on REs website under Interest
rates and Service Charges.
Whenever reminders for non-compliance of material
terms and conditions of loan are sent to borrowers,
the applicable penal charges shall be
15communicated. Further, any instance of levy of
penal charges and the reason therefor shall also be
communicated.
These instructions shall come into effect from
January 1, 2024. REs may carry out appropriate
revisions in their policy framework and ensure
implementation of the instructions in respect of all
the fresh loans availed/ renewed from the effective
date. In the case of existing loans, the switchover to
new penal charges regime shall be ensured on next
review or renewal date or six months from the
effective date of these instructions, whichever is
earlier.
G. Master Circular - Loans and Advances - Statutory and Other Restrictions dated July
1, 2015
Para Guidelines on Fair The quantum and reason for penal charges shall be
graph Practices Code for clearly disclosed by REs to the customers in the loan
2.5 Lenders agreement and most important terms & conditions /
Key Fact Statement (KFS) as applicable, in addition
to being displayed on REs website under Interest
rates and Service Charges.
Whenever reminders for non-compliance of material
terms and conditions of loan are sent to borrowers,
the applicable penal charges shall be
communicated. Further, any instance of levy of
penal charges and the reason therefor shall also be
communicated.
16