[anjan_c2007]

The Reserve Bank of India (RBI) has issued a new directive for banks non-banking finance companies (NBFC's) and other lenders that come under the RBI Act 1934, as Regulated Entities (RE's) to ensure transparency for borrowers in respect of loans for which defaults take place while repaying.

According to the new directive, penalty if charged for non-compliance of material terms and conditions of loan contract by the borrower would be treated as 'penal charges' and shall not be levied in the form of 'penal interest' that is added to the rate of interest charged on the advances. RBI said the new directives follow findings that many REs are using penal rates of interest, over and above the applicable interest rates, in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned.

This follows findings that many REs are using penal rates of interest, over and above the applicable interest rates, in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned.

“The intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest,” the RBI said in a circular.

“However, supervisory reviews have indicated divergent practices amongst the REs with regard to levy of penal interest/charges leading to customer grievances and disputes,” it added.

And the quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of loan contract without being discriminatory within a particular loan / product category.

“Whenever reminders for non-compliance of material terms and conditions of loan are sent to borrowers, the applicable penal charges shall be communicated. Further, any instance of levy of penal charges and the reason therefore shall also be communicated,” the RBI circular said.

And the REs have been asked to carry out appropriate revisions in their policy framework and ensure implementation of the instructions in respect of all the fresh loans availed/ renewed from the effective date.

In the case of existing loans, the switchover to new penal charges regime will be ensured on next review or renewal date or six months from the effective date of this circular, whichever is earlier, the circular said.

These instructions will, however, not apply to Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations which are covered under product specific directions, the RBI has clarified.

These instructions will come into effect from January 1, 2024.

The newslink:-
https://www.thehindu.com/business/rb...le67208498.ece

[Lalvaz]

Pardon my ignorance, I really tried reading and re-reading this, but didn't understand the implications. Can someone spell out in layman terms what this move means to the common man? A few questions which I'm confused about:

1) How will things change?
2) Will the penal interest % reduce as a result of this move OR will it be just rebadging the penal interest to penal charge?
3) Will this impact the settlement amount in case of default and subsequent settlement of delinquent accounts?
4) Will it reduce or increase bank NPA's?
5) Will it reduce or increase bank's profit margins?

Thank you in advance.

Originally Posted by anjan_c2007

The Reserve Bank of India (RBI) has issued a new directive for banks non-banking finance companies (NBFC's) and other lenders that come under the RBI Act 1934, as Regulated Entities (RE's) to ensure transparency for borrowers in respect of loans for which defaults take place while repaying.

According to the new directive, penalty if charged for non-compliance of material terms and conditions of loan contract by the borrower would be treated as 'penal charges' and shall not be levied in the form of 'penal interest' that is added to the rate of interest charged on the advances. RBI said the new directives follow findings that many REs are using penal rates of interest, over and above the applicable interest rates, in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned.



The newslink:-
https://www.thehindu.com/business/rb...le67208498.ece

[anjan_c2007]

Originally Posted by Lalvaz

A few questions which I'm confused about:

1) How will things change?
2) Will the penal interest % reduce as a result of this move OR will it be just rebadging the penal interest to penal charge?
3) Will this impact the settlement amount in case of default and subsequent settlement of delinquent accounts?
4) Will it reduce or increase bank NPA's?
5) Will it reduce or increase bank's profit margins?

Thank you in advance.

Q.1. As regards your questions Q(1) answer can be found in the paras below.
Q.2. The penal interest opacity will reduce if it is replaced as penal charges that are in public domain.
Q.3. Yes in fact, if the borrower goes into more defaults and non-compliance, the account may turn into a delinquent account. Vice-versa if there is compliance by the borrower.
Q.4. Hypothetical to comment upon and varies case wise.
Q.5. Again its for the RBI and RE's viz. banks, NBFC's, lenders to answer.

The RBI notification dated 18.08.2023 is uploaded here for a better understanding of the new directives. A main takeaway is that the penalty, if charged, for non-compliance/ default by the borrower shall be treated as ‘penal charges’ of a reasonable amount commensurate with the non-compliance and default. It shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances. There shall be no capitalisation of penal charges i.e., no further interest computed on such charges. Moreover these penal charges have to be disclosed under the terms and conditions of the loan agreement and also on the website of the RE's.

RBI August 2023 FAIR LENDING PRACTICE.PDF

The normal procedures for compounding of interest as per the loan terms and conditions remain the same. It means that these banks, NBFC's, lenders cannot play their own games once they start with levy of "penal interest". Penal interest that they used to arm twist borrowers with, gets replaced by penal charges that have to be transparently mentioned.

But sadly, credit card, External Commercial Borrowings (ECB's), Trade Credits and Structured Obligations are not covered in this direction. Our interest is mainly with regard to auto/home/consumer loans and credit card outstanding amounts. The latter is not covered.