RBI relief for borrowers missing payments
RBI has barred banks and finance companies from charging penal interest, which is often charged from customers for delay in repaying loan installments
The Reserve Bank of India has given a big relief to the loan takers. RBI’s guidelines regarding penal charges i.e. penalty on loan accounts have come into effect from April 1, 2024. The new guidelines will provide relief to those who are taking personal loans, home loans, auto loan or any other loan. But if for some reason you are not able to pay the EMI on time, then now the bank will not be able to charge penal interest on them. Let us understand why the Reserve Bank had to issue this guideline and how will loan takers benefit from it?
RBI has barred banks and finance companies from charging penal interest, which is often charged from customers for delay in repaying loan installments. Apart from this, banks cannot include any additional component in the interest rate. This means that banks cannot increase the interest rate even if EMI is missed. However, in case of delay in paying the installment, it is permissible to impose penal charges. To put it simply, late charges are allowed. But capitalisation of penal charge i.e. by adding the penal charge to the principal amount of the loan will not be allowed. Interest will not be charged on the penal charge.
The purpose behind imposing penal charge or penal interest is to teach discipline to people regarding debt, instead of capitalising or getting income out of it. RBI found that banks and finance companies charge late fees and interest to increase earnings. Due to this, common people taking loans face problems.
Banks often impose penalties on the borrower for loan default or non-compliance of loan terms. This fine is taken in the form of penal charge and penal interest. Penal charge is a fixed fee, which is separate from interest. Whereas penal interest is an additional rate added to the existing interest rate of the customer. The central bank has stopped banks from charging penal interest. RBI has also instructed banks that penal charges cannot be added to the loan amount nor can additional interest be levied on such charges.
On delay in repayment, banks will levy charges on the defaulted amount as per the policy approved by the bank’s board. The Reserve Bank has asked banks to adopt an equitable approach regarding charges. Also, the penal charge should be reasonable. No upper limit for penal charges has been fixed in the RBI circular. However, banks and finance companies have been asked to keep in mind that the purpose of penal charge is to establish discipline regarding loans and not to be used to increase earnings.
New guidelines regarding penal charges have come into effect from April 1. These guidelines will be applicable to new loans as well as old loans. These rules are applicable to regulated entities under RBI, which means all commercial banks, small finance banks, rural banks, co-operative banks, apart from non-banking finance companies and housing finance companies are included. However, these guidelines are not applicable to Rupee/Foreign Currency Export Credit and Foreign Currency Loans.
After the rules implemented from April 1, now the bank can charge penal charge i.e. late fee if your EMI is late. But interest cannot be charged on such fees nor can interest be charged on this late fee by adding it to the loan amount. If you miss loan EMI, you not only have to pay late fees, but it also spoils your credit score. If your credit score is bad, you will face a lot of difficulty in getting a new loan and credit card. Therefore, it is better to pay EMI on time to avoid penal charges and credit score damage.