RBI directs review of unfair interest practices by financial institutions

New Delhi [India], April 29 : In a recent directive issued by the Reserve Bank of India (RBI), all commercial banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks, non-banking financial companies (NBFCs), including microfinance institutions and housing finance companies, have been instructed to review their practices regarding the charging of interest.

According to RBI, the directive, effective immediately, aims to address concerns over certain unfair practices observed during RBI's onsite examination of regulated entities (REs) for the period ended March 31, 2023.

The guidelines on Fair Practices Code (FPC) issued to various REs since 2003 emphasize fairness and transparency in charging interest by lenders while providing them with freedom in their loan pricing policy.

However, RBI identified instances of lenders resorting to non-standard practices in charging interest during its examination, prompting the issuance of this directive.

Lenders were found charging interest from the date of loan sanction or agreement, rather than from the actual disbursement of funds to the customer.

Similarly, interest was charged from the date of the cheque in cases where the cheque was handed over to the customer several days later.

In cases where loans were disbursed or repaid during the month, some REs were found charging interest for the entire month instead of only for the period the loan was outstanding.

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

These practices are deemed inconsistent with the principles of fairness and transparency in customer dealings, raising serious concerns for the RBI.

The supervisory teams of the RBI have advised REs to refund excess interest and other charges to customers wherever such practices have been identified.

Furthermore, REs are encouraged to transition to online account transfers instead of issuing cheques for loan disbursals, aiming to streamline processes and enhance efficiency.

In light of these observations, all REs are directed to review their practices regarding the mode of disbursal of loans, application of interest, and other charges.

They are instructed to take corrective actions, including system-level changes, to address the highlighted issues.

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