RBI Keeps A Close Eye On Extra Interest On Loans – Asks Banks to Review Practices

The Reserve Bank of India (RBI) has instructed banks and non-banking financial companies (NBFCs) to promptly review their practices to guarantee fairness and transparency in the interest rates applied to customers. This directive follows the detection of various cases where loans were subject to excessive interest charges. The RBI highlighted in its circular that, during on-site examinations of regulated entities such as banks, NBFCs, and housing finance companies up to March 31, 2023, it came across instances where lenders were engaging in unfair practices regarding interest rates.

Revelations after the Inspection

During an onsite examination, the RBI identified several unfair practices, including charging interest from the date of loan sanction or agreement execution rather than from the actual disbursement date. 

Additionally, instances were found where interest was levied from the date of the cheque issuance, even if the cheque was handed to the customer several days later. Some banks were also observed charging interest for the entire month instead of only for the period the loan was outstanding. Furthermore, certain banks were collecting advance installments but calculating interest based on the total loan amount.

RBI’s instructions 

The RBI has expressed serious concerns regarding these non-standard interest charging practices, emphasizing the issues of fairness and transparency with the customers. Upon uncovering these practices, the RBI’s supervisory teams have instructed banks, NBFCs, and housing finance companies to reimburse customers for any excess interest and charges immediately. Additionally, lenders are being urged to adopt online account transfers as an alternative to issuing cheques for loan disbursals in certain instances.

Conclusion: In conclusion, the Reserve Bank of India’s message is clear that banks and financial institutions must treat their customers fairly and openly, with transparency, especially when it comes to charging interest. By identifying and addressing these unfair practices, the RBI ensures that the banking system treats everyone fairly and prevents customers from getting exploited or being taken advantage of.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.