Big relief to borrowers! New RBI rule against penal interest charge on late EMI payment kicks in

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New Delhi: If you’re a borrower with an outstanding loan, then pay attention to new rules on penal charges and interests on loan facilities introduced by the Reserve Bank of India. These rules are aimed at ensuring that banks and non-bank lenders are playing fair with borrowers when it comes to charges imposed on missed loan payments apart from penalties for breach of any other rules in the loan agreement.

What is penal interest charge?

Penal interest charge is recovered from borrowers for missing an EMI payment or making a late EMI payment. Banks and other lenders will not be able to charge an extra fee on the interest rate going forward. The RBI introduced this rule after it was discovered that banks and other lenders are adding the penalty of late payment to the loan amount, thereby driving up the overall EMI due.

Lenders can still impose a late payment fine, but they cannot add this amount to the loan amount. A penalty should be used to correct errant borrower behaviour. However, banks and lenders must refrain from boosting their balance sheets through the unfair imposition of penalties, according to the RBI. The new RBI guidelines on penal interest charges recovered from borrowers kicked in on April 1, 2024.

Are existing loans covered by new rule?

Yes, the new rule will apply to all existing loans from June 1, 2024. From April 1, 2024, all new loans will be covered by the RBI rule on penal charges. The central bank has decided to streamline the penalties imposed on retail as well as commercial borrowers for the greater good of consumers. The central bank has not specified any upper ceiling on penal charges for loan EMI repayment default.

Which loans are excluded from the new RBI loan rule?

The new RBI loan rule does not apply to rupee/foreign currency export credit loans. The rule also does not apply to other foreign currency loans. The central bank has directed banks and lenders to reverse any accrued income on nonperforming loan accounts.

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