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What RBI said about charging of interest by banks - refund excess charges
Unfair practices by banks? RBI tells lenders to refund excess charges to customers.
The Reserve Bank of India (RBI) on Monday has asked some banks and lenders to stop using unfair practices while charging interest from borrowers, PTI reported. The central bank went beyond doing just that and even directed them, via a circular, to take corrective action and refund excess charges to customers, PTI added. The circular is effective immediately, the RBI said.
The central bank said, “During the course of the onsite examination of REs for the period ended March 31, 2023, the Reserve Bank came across instances of lenders resorting to certain unfair practices in charging of interest.”
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On the issues concerning the charging of unfair interest, the central bank circular said, “…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….”
Unfair practices followed by some lenders: RBI highlights instances
1. The RBI said it observed 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 funds to the customer.
2. Interest being charged from the date of the cheque whereas it was handed over to the customer several days later.
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3. During disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than only for the period for which the loan was outstanding.
4. REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.
The RBI said that such unfair practices of charging interest while dealing with customers are not in consonance with the spirit of fairness and transparency.
The central bank let it be known in the circular how seriously it considered this matter. It said, “These are matters of serious concern to the Reserve Bank. Wherever such practices have come to light, RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers.”
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REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal, it added.
