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Fair Practices Code for Lenders – Charging of Interest

Reserve Bank of India (RBI) has directed the regulated entities to ensure fairness and transparency in charging of interest.

What unfair practices were observed by RBI?

Some of the unfair practices observed by RBI during the course of the onsite examination of regulated entities (REs) for the period ended March 31, 2023 are given below.

  • Charging of interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer. 
  • In the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later.
  • In the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
  • In some cases, it was observed that REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.

What action has been taken by RBI?

  • Wherever such practices have come to light, RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers. 
  • REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal.
  • REs are directed to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system level changes, as may be necessary, to address the issues highlighted above.


References

Reserve Bank of India. (2024, April 29). 'Fair Practices Code for Lenders – Charging of Interest'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12678&Mode=0


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