Are you being overcharged on loan interest? The Reserve Bank of India (RBI) has identified instances of unfair lending practices by banks and other financial institutions when it comes to charging interest on loans.
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In response, the RBI has issued a directive urging these institutions to correct their practices and ensure fair treatment of borrowers. Here are the four key areas where banks have been found to be overcharging borrowers:
In a notification issued by the RBI on April 29, 2024, the following unfair practices by banks and other financial institutions were identified:
– Charging interest from loan sanction date: Some lenders were charging interest from the date the loan was approved or when the loan agreement was signed, instead of from the actual date the money was disbursed to the customer.
– Interest charged from cheque date: For loans disbursed by cheque, some banks were charging interest from the date on the cheque, even though the cheque was given to the customer several days later. This led to customers paying interest for a period when they didn’t have access to the funds.
– Charging interest for the full month: Some lenders were charging interest for the entire month even if the loan was disbursed or repaid partway through the month. This caused customers to be overcharged on their loans.
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– Counting instalments in advance for interest calculation: In some cases, banks collected one or more instalments in advance but still counted the full loan amount for calculating interest. This meant that customers were paying interest on money they had already repaid.
RBI’s response and directives
The RBI has ordered banks to refund customers for any excess interest and additional charges. According to the RBI, these practices violate the principles of fairness and transparency, emphasising that these concerns are significant to the central bank.
The RBI has also advised banks to switch from cheque-based disbursements to online transactions. According to an ET report, it has instructed all banks and non-banking finance companies (NBFCs) to review their loan disbursement practices, how they calculate interest, and other fees. Banks should make changes, including updating their systems, to resolve these issues and prevent further unfair practices.
RBI’s new initiatives for fair loan practices
The central bank has introduced new measures to ensure banks don’t engage in unfair practices when offering loans to customers.
Banks must now provide a Key Fact Statement (KFS) to borrowers in simple, clear language. This document, in a standard format, will contain key loan details like interest rates, EMIs, and other charges.
This aims to help borrowers understand the terms before signing a loan contract. Banks will also need to get an acknowledgement from borrowers to confirm they’ve read and understood the KFS. This rule takes effect on October 1, 2024, for all new retail and MSME loans.
