RBI bars lenders from levying penal interest on default by borrowers

RBI has directed lenders to levy penalty for default by borrowers as ‘penal charges’ and not as ‘penal interest’ which is added to the rate of interest charged on the advances.

The quantum of penal charges should be “reasonable” and “commensurate with the non-compliance of loan contract” without being discriminatory within a particular loan/ product category, the RBI said in its guidelines on Penal Charges in Loan Accounts under the Fair Lending Practice.

The norms were released after the RBI found that many regulated entities (REs) — lending institutions regulated by the central bank — were levying penal rates of interest, over and above the applicable interest rates, in case of defaults or non-compliance by the borrower with the terms on which credit facilities were sanctioned.