The Reserve Bank of India (RBI) issued a directive on Monday, instructing banks and non-banking financial companies (NBFCs) to immediately review their procedures to ensure fairness and transparency in the interest rates they apply to customers, following the discovery of instances where excessive interest charges were levied on loans.
According to a circular released by the RBI, during its onsite examination of regulated entities including banks, NBFCs, and housing finance companies for the period ending March 31, 2023, it identified cases where lenders engaged in unfair practices related to interest charges.
The circular mandates all regulated entities to scrutinize their practices concerning loan disbursal methods, interest application, and additional charges, and to implement corrective measures, including system-level adjustments, as deemed necessary to rectify the identified issues.
The RBI highlighted several unfair practices, such as charging interest from the date of loan sanction or agreement execution rather than from the actual disbursement date, and charging interest from the date of the cheque issuance instead of the date it was handed over to the customer.
Additionally, some banks were observed charging interest for the entire month, regardless of the actual duration for which the loan was outstanding, and collecting multiple installments in advance while applying interest on the full loan amount.
The RBI expressed serious concerns about these non-standard interest charging practices, emphasizing the importance of fairness and transparency in customer dealings.
The central bank disclosed that where such practices were detected, it instructed banks, NBFCs, and housing finance companies to refund excess interest and other charges to affected customers.
The RBI has encouraged lenders to utilize online account transfers as an alternative to issuing cheques for loan disbursal in certain cases.
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