RBI finds ‘unfair practices in charging of interest’, asks banks to review

The Reserve Bank of India (RBI) on Monday directed banks and non-bank financiers to review some of their lending practices when it comes to applying interest and other charges to borrowers along with their mode of loan disbursal.

It said a review of the lending practices would be in the interest of fairness and transparency, and the directive comes after RBI found instances where lenders were resorting to certain “unfair practices in charging of interest”.

The regulator found that some lenders have been charging interest from the date of sanction of loan or the date of execution of the loan agreement, instead of the date of actual disbursement of the funds to the customer. Similarly, in the case of loans being disbursed by cheque, RBI said it found that some lenders were charging interest from the date of issuance of the cheque, even as the cheque was handed over to the customer several days later.

“The guidelines on fair practices code issued to various regulated entities (REs) since 2003, inter-alia, advocate fairness and transparency in charging of interest by the lenders, while providing adequate freedom to REs as regards their loan pricing policy,” it said.

Guidelines exclude payments banks

The directive on Monday is applicable to all commercial banks, including small finance banks, local area banks and regional rural banks, but exclude payments banks. They are also applicable to all urban co-operative banks, state co-operative banks, district central co-operative banks and all non-banking financial companies.

“In the case of disbursal or repayment of loans during the course of the month, some REs (regulated entities) were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding,” it said.

RBI also said that in some cases, it found lenders were collecting one or more instalments in advance but reckoned the full loan amount for charging interest.

“These are matters of serious concern to the Reserve Bank,” it said. “These and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers.”

According to the regulator, wherever such practices have come to light, it has advised lenders to refund such excess interest and other charges to customers. RBI said it is also encouraging lenders to use online account transfers instead of cheques in a few cases for loan disbursal.