RBI Asks Lenders to Be Fair in Charging Interest From Borrowers

Cases in which the borrower has felt trapped by lenders' unfair practices due to their lack of transparency and knowledge of the subject matter have always been at their peak, seeming nowhere near to reducing anytime soon. RBI reported around 13 thousand such loan cases in 2023, in which the loan sharks impersonated themselves to come from a reputable bank, making innocent borrowers fall prey to such scams.

This long history seems to stop no sooner, but we hope one can rescue oneself with tight regulations and guidelines laid by RBI and followed by lenders. Just like in 2003, to play fair and be fair, RBI issued guidelines for lenders or regulated entities to follow while lending out loans to borrowers in the interest of transparency. This year, RBI: Fair Practice Code for Lenders—Charging of Interest was rolled out on April 29, 2024, with immediate effect.

The RBI has encountered instances where lenders have resorted to unfair practices, particularly in charging interest. Borrowers must be vigilant and informed about these ongoing malpractices, which are unfortunately prevalent among banks, financial institutions, and all regulated entities. At the same time, lenders must be reminded to avoid such practices.

Which lenders get affected?

The lenders affected by this circular are:

• Scheduled Commercial Banks
• Payments Bank
• Small Finance Banks
• Urban Co-operative Banks (Tier 3 & 4)
• NBFCs (Upper and middle layer)
• Housing Finance Companies
• Credit Information Companies

RBI digs out loopholes of the REs on charging unfair interests in the following situations:

1. 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 this case, the loan has just been authorised and approved. The borrower has not yet received the loan amount since the disbursement process has yet to be initiated. Regulation by the RBI states that the charging of interest should start from the date of actual disbursement of the funds to the customer.

2. There are instances where interest is charged from the day the cheque is dated, but the cheque is handed over to the customer several days later

   The lenders must take this into consideration, and the borrowers shall know the latest updates that they need not pay interest from the day of the cheque date but pay when the cheque is actually handed over to the borrower. Previously, the borrowers were obliged to pay the interest from the day of the cheque date, even though it was not handed over to them for many days. This results in paying more than the actual amount for no good result.

3. In the case of disbursal or loan repayment during 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

   For example, your disbursal process is active from the 15th of April, but you are said to pay the interest for the entire month of April, including the first half of the month. This does not make sense as your disbursal amount has not been granted yet.

   Similarly, if you are at the end of your tenure and your only repayment amount left is from the 15th of April to the 15th of May of 2024, but you are said to pay an amount for the rest of the whole month of May as well, results in questionable interest charged, where in reality, there is no outstanding amount left as such. Knowing these small details is necessary because they can come in handy anytime and save you your hard-earned money.

4. REs collected one or more installments in advance but reckoned the full loan amount for charging interest

   REs were found collecting installments in advance from the borrowers and computing charging interest on the entire loan amount, which includes the pre-paid installment. However, after the declared declaration by the RBI, it restricts the lenders from charging interest on the total loan amount if there is a pre-paid EMI done in advance and computing only after netting off the prepaid EMI from the disbursement amount.

It is a matter of utmost concern, and RBI, with its supervisory team, suggests REs conclude such practices that initiate hindrances in people's day-to-day lives. RBI also advised refunding extra charges and excess funds charged to customers. To highlight the importance of being fair and transparent, RBI has encouraged REs to use online account transfers rather than issuing cheques to process loan disbursals.

These regulations laid out by the RBI will help keep the processes clean and transparent from malpractices. It's every citizen’s duty to be responsible and vigilant in cases that bring a nightmare to their lives. Understanding the ins and outs of opening and closing accounts, knowing the basic personal loan terminologies , and being aware of the ongoing trends in the personal finance industry will keep us smart and alert all the time, irrespective of any given situation.