The Reserve Bank of India has decided to extend the timeline for implementation of guidelines for lenders on penal charges in loan accounts by three months.

In August, the RBI had issued fresh guidelines for lenders on penal charges in loan accounts to ensure that penal interest/ charges is not used as a revenue enhancement tool by them, over and above the contracted rate of interest.

The central bank’s instructions was supposed to come into effect from January 1, 2024. However, considering that certain clarifications and additional time has been sought by some regulated entities (REs) to reconfigure their internal systems and operationalise the circular, it has been decided to extend the timeline for implementation of the instructions by three months. “

“Accordingly, REs shall ensure that the instructions are implemented in respect of all the fresh loans availed from April 1, 2024 onwards. In the case of existing loans, the switchover to new penal charges regime shall be ensured on the next review/ renewal date falling on or after April 1, 2024, but not later than June 30, 2024,” RBI said

Under the new rules, penalty, if charged, for non-compliance of the material terms and conditions of the loan contract by the borrower should be treated as ‘penal charges. It cannot be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances, according to instructions relating to ‘Fair Lending Practice - Penal Charges in Loan Accounts’.

There should be no capitalisation of penal charges -- that is no further interest computed on such charges.

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