The Reserve Bank of India (RBI) has decided to postpone the implementation of a new penal charges regime by three months, extending the deadline from January 1, 2024, to April 1, 2024. The extension applies to new loans, while existing loans are expected to transition to the new penal regime by June 30, 2024, according to a recent notification by the RBI.
Credit discipline guidelines
In August of the previous year, the banking regulator had issued guidelines aimed at preventing banks from imposing penal interest rates in cases of borrower defaults. The guidelines were introduced to shift the focus from using penal charges as a revenue enhancement tool to instilling credit discipline amongst borrowers.
The circular released by the RBI stated, “It has been decided to extend the timeline for implementation of the instructions by three months. Accordingly, regulated entities (banks) shall ensure that the instructions are implemented for all fresh loans obtained from April 1, 2024, onward. For existing loans, the transition to the new penal charges regime should occur on the next review/renewal date falling on or after April 1, 2024, but no later than June 30, 2024.”
Fair and transparent penalties
The guidelines specified that penal charges, if imposed, would be considered as such and not in the form of penal interest. Additionally, there would be no capitalisation of penal charges, meaning no further interest would be calculated on such charges. The quantum of penal charges was required to be reasonable and proportional to the non-compliance, without discrimination within a particular loan category.
The guidelines also outlined that penal charges for loans sanctioned to individual borrowers for non-business purposes should not exceed those applicable to non-individual borrowers for similar non-compliance. To prevent arbitrary interest rates, banks were mandated to follow a board-approved policy on penal charges for similar offences on loans.
Notably, these instructions did not apply to credit cards, as they are covered under product-specific directions. Initially scheduled to take effect on January 1, 2024, the implementation of these guidelines has now been deferred until March 31, 2024.
