The Reserve Bank of India has directed all lenders 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 ensure fairness and transparency while dealing with customers.

The central bank’s directions come as it encountered instances of lenders resorting to certain unfair practices in charging interest during the onsite examination of lenders (regulated entities/REs) for the period ended March 31, 2023.

REs include all commercial banks ((including small finance banks, local area banks and regional rural banks), excluding payments banks; co-operative banks; and all non-banking financial companies (including microfinance institutions and housing finance companies).

The RBI highlighted a few unfair practices, including the charging of interest from the date of sanction of loan or the date of execution of the loan agreement and not from the date of actual disbursement of the funds to the customer.

Similarly, 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, RBI observed that REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.

The central bank emphasised that these 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. Wherever such practices have come to light, the 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,” per the central bank directive.