The Reserve Bank of India has asked banks and other regulated lenders to end certain unfair practices seen in their loan business. The decision comes after the RBI found several lenders charging unfair interest on loans.
During the onsite examination of regulated entities for the period ended March 31, 2023, the Reserve Bank found the following “unfair practices” observed by many lenders to charge unfair interest on loans.
1. Charging interest from date of sanction
RBI found that lenders are charging 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 case of loans being disbursed by cheque, RBI found instances where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later.
2. Charging interest for full month during disbursal, repayment
In case of disbursal or repayment of loans during the course of the month, RBI found some lenders were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
3. Collecting more instalments in advance
In some cases, RBI observed that some regulated entities were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.
The Reserve Bank has said that above practices are not fair for customers and these matters are of “serious concern”.
“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,” RBI said in a notification on April 19, 2024.
RBI said that it has asked REs to refund excess interest to borrowers wherever such practices have come to light.
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It is also encouraging REs to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal.
Further, the central bank has has asked lenders to take corrective measures to end the above-mentioned unfair practices.
“Therefore, in the interest of fairness and transparency, all REs 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,” said.
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