RBI tells banks to stop charging extra interest on loans as probe shows unfair practices

MUMBAI — The Reserve Bank of India (RBI) on Monday directed banks and NBFCs to immediately review their practices to ensure that they are fair and transparent in the interest they charge customers as several instances have been detected where excessive interest has been charged on loans.

The RBI has pointed out in its circular that during the course of an onsite examination of regulated entities (banks, NBFCs and housing finance companies) for the period ended March 31, 2023, it came across instances of lenders resorting to certain unfair practices in charging interest.

“Therefore, in the interest of fairness and transparency, all regulated entities 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,” the RBI circular states.

Some of the unfair practices that the RBI has observed are:

• 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. 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 banks 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 banks were collecting one or more installments in advance but reckoning the full loan amount for charging interest.

The RBI said these and other such non-standard practices of charging interest which are not in consonance with the spirit of fairness and transparency while dealing with customers, is a cause for “serious concern”.

Wherever such practices have come to light, the RBI through its supervisory teams has advised banks, NBFCs and housing finance companies to refund such excess interest and other charges to customers, the central bank said.

The lenders are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal, the RBI said.