RBI's Directive on Fair Practices in Interest Charging by Regulated Entities

The Reserve Bank of India (RBI) has issued a circular on 29th April 2024 emphasizing fair and transparent practices in the charging of interest by Regulated Entities (REs), following instances of unfair practices observed during onsite examinations up to March 31, 2023.

Key Observations:

• Charging of Interest: The RBI noted instances where lenders were charging interest from the date of loan sanction or execution of the loan agreement, rather than from the actual disbursement date. Similarly, interest was applied from the date of the cheque issuance, even if the funds were handed over to the customer days later.

• Monthly Interest Calculation: Some REs were found to charge interest for the entire month, irrespective of the actual duration for which the loan was outstanding during that month, which contradicts fair practices.

• Advance Instalments: In cases where REs collected one or more instalments in advance, they were still calculating interest on the entire loan amount, which is deemed unfair to customers.

• RBI's Response: The RBI considers these practices detrimental to customer interests and has directed REs to refund any excess interest and charges to affected customers promptly. Additionally, REs are encouraged to adopt online account transfers instead of issuing cheques for loan disbursals in some cases.

• Corrective Actions: In light of these observations, all REs are instructed to review their loan disbursal processes, interest calculation methods, and other charges. They must implement necessary system-level changes to rectify the identified issues and ensure compliance with fair practice norms.

• Immediate Implementation: The circular is effective immediately upon issuance, underscoring the urgency of addressing these issues to uphold fairness and transparency in customer dealings.

Conclusion:

The RBI's directive underscores its commitment to protecting consumer rights and maintaining integrity in financial transactions. By mandating REs to adhere strictly to fair practices in interest charging and other related procedures, the RBI aims to enhance trust and accountability in the banking and financial sector.

This summary encapsulates the RBI's concerns, observations, and directives aimed at promoting fair practices in interest charging by REs, ensuring a more equitable environment for customers in financial transactions.