Late payment penalties may be reduced

MUMBAI: The RBI will review regulations to ensure that lenders don’t charge high penalty rates to borrowers for delays in repayment. The new rules will require penal charges to be reasonable and transparent and not take the form of a top-up to the interest rate already being charged.

According to the RBI, the purpose of penal interest was to instil discipline in repayments and not to generate revenue for lenders. “Supervisory reviews have indicated divergent practices among regulated entities with regard to the levy of penal interest which were excessive in certain cases, leading to customer grievances and disputes,” the RBI said.

According to RBI deputy governor M Rajeshwar Rao, during supervision, banks were found to have added a penal rate on top of the nominal interest rate in the case of payment defaults and non-compliance with the terms and conditions of the loan. He said that the practices were not uniform and were leading to excessive charges in some cases, triggering grievances and disputes.