As a result, regulated entities, such as banks and NBFCs, have been required to guarantee that the directions be followed for any new loans obtained beginning April 1, 2024. In the case of existing loans, the RBI stated that the transition to the new punitive charges regime should occur on or after April 1, 2024, but no later than June 30, 2024.
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Here are important FAQs on Fair Lending Practice regarding penal charges in loan accounts, as released by RBI on January 15, 2024.
What is the upper limit/cap for charging penal charges
The circular does not specify a cap or upper limit for penal charges; however, the REs should bear in mind that the purpose of imposing penal charges is to instill credit discipline and not to be used as a means of increasing revenue when drafting their Board-approved penal charges policy. According to the RBI FAQs on fair lending practices, “Accordingly, the quantum of penal charges shall have to be ‘reasonable’ and ‘commensurate’ with the non-compliance of material terms and conditions of loan contract.”
Whether the interest charged for the period of default (including in case of unpaid EMI) will also be treated as penal interest or regular/overdue interest?
In terms of para 3(i) of the circular, the prescribed guidelines will not affect the normal procedures for compounding of interest in the loan account. Therefore, REs may charge interest on unpaid interest (including on unpaid EMI) at the contracted rate of interest till the date of remediation, and not at the penal rate of interest. (a) Can the penal charges be different within the same product category depending upon the amount of loan?
Yes. REs may formulate an appropriate Board approved policy and adopt a suitable structure of penal charges that is ‘reasonable’ and ‘commensurate’ with the non-compliance of material terms and conditions of the loan contract.
(b) With respect to para 3(iv) of the circular, whether the structure of penal charges in the same category of loan/product shall be uniform for all borrowers irrespective of their constitution (individual & non-individual)?
Yes. The structure of penal charges within a particular loan / product category shall have to be uniform irrespective of the constitution of the borrower.
If penal charges are not paid, whether fresh penal charges can be levied on the earlier outstanding amount of penal charges?
No. Additional penal charges cannot be levied on the earlier outstanding amount of penal charges.
Whether Cash Credit and Overdraft (OD) facilities are exempted from penal charges guidelines and subject to penal interest?
The instructions issued vide the circular are applicable to all credit facilities except those specifically exempted in the circular.
If the schedule of penal charges is displayed on the website of the RE and only a reference of the said schedule is given in the sanction letter and loan agreement issued to the customer, whether the same may be treated as compliance to para 3(vi) of the circular?
No. The quantum and reason for penal charges shall have to be clearly disclosed by REs to the customers upfront in the loan agreement and Most Important Terms & Conditions (MITC) / Key Fact Statement (KFS), as applicable.
Whether GST would be applicable on penal charges? If yes, at which stage the GST would be payable i.e., at the time of accrual or the day on actual realization/recovery?
Since instructions related to GST are issued by Central Board of Indirect Taxes & Customs (CBIC), instructions and clarifications, if any, issued by CBIC in this regard may be followed.
Whether the prescribed instructions on penal charges are applicable in case of rupee/ foreign currency export credit and other foreign currency loans?
No. The prescribed instructions on penal charges are not applicable in case of rupee/ foreign currency export credit and other foreign currency loans.