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RBI Ordered Banks To Refund Excess Interest

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RBI ORDERED BANKS TO REFUND EXCESS INTEREST

The Reserve Bank of India (RBI) has come across instances of lenders resorting to certain unfair practices in charging of excess interest from borrowers.

The RBI, through its supervisory teams, has advised banks to refund such excess interest and other charges to customers.

THE UNFAIR PRACTICES

  • Banks were 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, the RBI said.
  • 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.
  • It was also observed that banks were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.

THE RBI DIRECTIVE

In a circular issued on Monday (April 29), the RBI directed banks and NBFCs 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 by the RBI.

This is in the interest of fairness and transparency, the RBI said.

Through its supervisory teams, it has advised banks to refund such excess interest and other charges to customers.

RBI POLICY ON INTEREST RATES

The guidelines on Fair Practices Code, issued to various Regulated Entities (REs) like banks and NBFCs since 2003, advocate fairness and transparency in charging of interest by the lenders, while providing adequate freedom to banks as regards their loan pricing policy.

DO BANKS INFORM BORROWERS IN CASE OF CHANGES IN INTEREST RATES?

  • A major complaint of borrowers is that banks don’t inform them properly about the change in interest rates.
    • At the time of sanction, banks are supposed to clearly communicate to the borrowers about the possible impact of change in benchmark interest rate on the loan leading to changes in EMI and/or tenor or both.
  • Subsequently, any increase in the EMI/tenor or both on account of the above should be communicated to the borrower immediately through appropriate channels.
  • At the time of reset of interest rates, REs should provide the option to the borrowers to switch over to a fixed rate as per their Board approved policy.

 

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