Banks Can No Longer Treat Fine As ‘Penal Charge’, Say New RBI Guidelines

The Reserve Bank of India (RBI) has prepared a new draft of 12 points to curb the arbitrariness of banks. In this draft, penal charges have been kept at the centre. Many loan recipients lodged complaints in this regard, and now RBI has taken action. Suggestions have been sought from banks, non-banking financial companies and housing finance companies on this draft by May 15, 2023. If the new rules are implemented, then the people taking the loan will get its benefit directly.

The governor of the RBI, Shaktikanta Das, stated that guidelines in this regard will be released soon. Let’s now discuss what a penal charge is. A fixed instalment, or EMI, is what you are required to pay each month when you take out a loan from a bank or other regulated financial institution. The lending institution applies a penalty charge in the event of default or a delay in its payment. It is a type of fine that is issued to motivate people to pay their EMIs on time.

However, many banks are charging the penal charge in the form of interest, which increases in a compounded manner. RBI guidelines prohibit banks from using penal charges as a source of revenue but banks are indulging in it, all the same, greatly inconveniencing the borrowers, who get trapped in debt.

Banks will no longer be permitted to treat the fine as a “penal charge”, per the latest draft released by the RBI. As of now, the bank bases its penalty on compounding interest. It will be treated as an immediate fine. Also, the terms and conditions about the penalty charge must be disclosed to the clients. In addition, banks should have a board-approved policy regarding penalty fees for loans or any other fees of this nature. It is anticipated that this will lessen conflicts between clients and financial organisations.

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