RBI Asks Lenders to Review And Refund Unfair Interest Charges: Know Why

In 2003, the Reserve Bank of India (RBI) issued guidelines on Fair Practice Code For Lenders to ensure transparency and fairness. These guidelines gave lenders adequate freedom in loan pricing while protecting the borrower’s interest. 

A few of these guidelines directed financial institutions to adhere to the following with regard to interest and charges:

• Notify customers about any changes in their terms and conditions, including service charges and interest rates, in a timely fashion 
• Ensure that any changes in charges and interest rates are effected only prospectively 

During an onsite examination for the period ending March 21, 2023, the RBI found instances of unfair practices followed by lenders concerning the charging of interest. This prompted the RBI to issue a new notification outlining the practices observed and offer resolutions. 

Unfair Practices Observed by the RBI

Here is an overview of the unfair practices observed and explained by the RBI in the notification issued on April 29, 2024:

• Practice followed: Lenders were levying interest from the date of sanction or the date of execution of the loan agreement. 

Ideal Practice: Interest must be charged from the date of actual disbursement of the funds to the customer. 

• Practice followed: Lenders were charging interest for the whole month, even in the case of disbursal or repayment during the month. 

Ideal Practice: Lenders should charge interest only for the period the loan was outstanding.

• Practice followed: Lenders charged interest from the date of issue of the cheque in case of disbursal via cheques. 

Ideal Practice: The interest must be charged from the date when they handed over the cheque to the customer, which is generally several days after the date of issuance.

• Practice followed: Lenders collected one or more instalments in advance but charged interest on the full loan amount.

Ideal Practice: Interest must be charged only on the amount outstanding, i.e., the balance after deducting the advance payments.

Resolution Offered by RBI

With the above-mentioned unfair practices, lenders collected more interest from borrowers. The RBI deemed these and other non-standard practices to not align with the spirit of transparency and fairness. 

To remedy this, the RBI, through its supervisory team, advised the following to the Regulated Entities (REs):

• Refund the excess interest and other charges collected from customers
• Try doing online transfers instead of giving cheques when disbursing loans

In addition, the Reserve Bank of India also directed all REs to do the following in the interest of ensuring transparency and fairness:

• Review their practices for disbursal of loans
• Assess their process of levying interest and other charges
• Take corrective action when required, including system-level changes

An important point to remember is that while the RBI has not set an upper limit on penal charges, it has advised REs to ensure that the charges are not to be treated as a revenue enhancement tool. These charges are meant to inculcate a sense of discipline and, therefore, must be reasonable.

In adherence to these fair practices, Fibe offers Instant Personal Loans of up to ₹5 Lakhs at competitive rates starting at 2% per month. The PCI DSS App-based journey also helps ensure that the funds are transferred instantly and no interest is levied unfairly. Download the Fibe Personal Loan App or register on the website for access to instant funds.