Money
Charged ‘extra’ interest on a loan by your bank? Here’s what to do
Summary
- In a directive dated 29 April, the central bank noted three unfair practices with respect to interest on loans that banks need to stop
Chennai-based Eswar Kumar was ecstatic when he finalized his first house purchase. Getting a home loan was also easy—he had a long-standing relationship with Canara Bank where he had his salary account. Kumar, a chartered accountant by profession, was promised by his bank relationship manager (RM) that his home loan of ₹70 lakh and home improvement loan of ₹8 lakh would be approved without any hassle. But there was one condition—Kumar should help the RM achieve his monthly target by agreeing to get the loan sanctioned a month in advance. “I will get the demand draft (DD) made in September, but the loan will be disbursed in October when you need the money," Kumar’s RM said. Kumar purchased the house in October 2023.
Kumar agreed to the advance sanction, but little did he know that he would have to shell out nearly ₹48,000 extra in interest. “I was charged interest on both the home loan and the home improvement loan from the date of sanction. I was finally given the DD of the home loan 18 days later and the home improvement loan was disbursed three months later in December when I requested for it," said the 29-year-old. The bank might have charged pre-EMIs on the home improvement loan, but Kumar says he is not aware of this as the bank hasn’t explained the reason for charging interest on the home improvement loan when he did not request for disbursement until December. An email sent byMint to Canara Bank did not elicit any response at the time of filing this story.
Each time Kumar raised the issue with his bank RM, he was promised that the interest would be reversed. A few months later, the RM was transferred, leaving Kumar in the lurch. “The biggest mistake I committed was to not take this up with the bank via emails. All the communication was verbal with the RM. I will now lodge a complaint with the RBI (Reserve Bank of India)," said Kumar.
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Kumar’s grievance may indeed get addressed by the central bank, which has recently warned banks, non-banking finance companies (NBFCs) and other registered entities (REs) against resorting to “unfair practices" to extract extra interest on loans from borrowers. In a directive dated 29 April, the RBI mentioned three unfair practices with respect to interest on loans that banks need to stop—charging interest from the date of sanction in place of disbursal; in the case of disbursal or repayment of loans in a month, charging interest for the entire month rather than charging it only for the period for which the loan was outstanding; and collecting one or more instalments in advance but reckoning the full loan amount for charging interest. An advanceEMI refers to paying one or more EMIs before the loan is disbursed so that the principal amount minus the processing fee and the advance EMIs amount is disbursed. An advance EMI only consists of principal and not interest. This helps reduce the principal on which the total interest is calculated.
Raj Khosla, founder and managing director of MyMoneyMantra, said the RBI’s intervention will ensure fairer treatment and protect borrowers from paying for money they haven’t yet accessed. “Consider a ₹70 lakh home loan with a 9% interest rate. A one-month delay in disbursal could result in you being charged over ₹19,000 in extra interest," he said.
Mumbai-based Janvi, a credit analyst, knows this too well. When she checked her EMI statement after paying the first installment, Janvi realized she had paid nearly ₹8,000 more in interest. This was because there was a gap of 12 days between the date of cheque and when the builder received it. Janvi raised a complaint with the bank immediately. “I got the refund, but it was a three-month ordeal. The bank kept making excuses that the delay was due to holidays and weekends. I am aware of these practices because I work in an NBFC," she said.
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It should be noted that the RBI’s warning is not limited to these three malpractices. “These (the three mentioned practices) and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers. These are matters of serious concern to the Reserve Bank," the RBI notification said.
Another instance where borrowers could end up paying extra interest is at the time of transferring their loan to a different lender.
In Gurgaon, Naveen Agrawal was charged interest twice on the same loan at the time of transferring his loan from State Bank of India (SBI) to Axis Bank. “SBI charged me interest till the time funds from Axis were not deposited in their account, which logically makes sense. However, Axis charged me interest from the date it prepared the cheque and not from the date it was encashed by SBI. So, ultimately I paid two working days’ interest to both the banks without any fault of mine," said the finance professional.
“The impact was around ₹3,000 only, but it’s surprising to see different practices adopted by different banks," Agrawal added. This happened in December, and despite reporting the matter to the RBI ombudsman, Agrawal is yet to get a refund on the excess interest he has paid.
All the borrowers who spoke toMint are finance professionals and savvy enough to identify when they were charged extra. However, most borrowers may not be able to figure out how their interest is calculated just by looking at the statement. This also applies to conditions when customers make prepayments on their loans.
After a prepayment is made, it is a common practice among banks to recalculate EMI on the outstanding principal from the next month. This should happen only when the lender accrues interest monthly, which is not the common practice among banks. Some NBFCs follow this method, butMint’s research shows they are few in number.
Khosla said loan interest accrues daily, not in monthly chunks, so whenever the borrower makes a prepayment, the interest should be recalculated based on the reduced outstanding principal balance from the day the prepayment is credited to their account. “When interest is calculated on a daily basis, prepayments immediately reduce the principal amount from the day they are received, regardless of the EMI deduction date," he said.
A home loan borrower with HDFC Bank told Minthe has made five prepayments on his loan in the last seven years, but each time the interest was recalculated on the reduced principal amount from subsequent months. “I wasn’t aware it should be done effective the date of the prepayment," he said, on the condition of anonymity.
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While the directive is aimed at loans, the same rule applies to credit card users also when they pay the minimum amount due or make partial payment of the total outstanding amount. The interest is levied on the remaining amount after adjusting for payments, refunds or reversed transactions, and not the entire bill amount. Also, late payment fee and other charges are also levied on the remaining amount.
When borrowers find such discrepancies in their interest calculation, they must report it to the bank or credit card card company through email. “In case you find you are being charged wrongly, your first step is to raise the matter with the grievance cell of the lender. The lender is mandated to resolve your dispute within 30 days of receiving your complaint. In case your complaint is not resolved, you can raise the matter with the Integrated Ombudsman of the RBI," said Adhil Shetty, chief executive officer of BankBazaar.com.
Emails sent to other major banks including HDFC Bank and Kotak Mahindra Bank seeking comment on the RBI’s directive did not receive any response.
