In a directive issued on Monday, the Reserve Bank of India (RBI) said all banks and NBFCs should immediately review their systems to ensure that they treat all customers fairly and transparently in terms of the interest rates they charge. This will be in response to the uncovering of several cases where borrowers have been made to suffer interest charges far in excess of what they were supposed to.
Highlighted in its circular, the RBI flagged certain unfair practices uncovered during onsite examinations of regulated entities such as banks, NBFCs, and housing finance companies, conducted for the period ending March 31, 2023. The circular emphasizes the imperative of fairness and transparency and mandates all regulated entities to scrutinize their practices concerning loan disbursal methods, interest application, and other charges. They are urged to take corrective measures, including system-level adjustments, to rectify the identified issues.
Among the observed unfair practices, the RBI identified:
Charging interest from the loan sanction date or agreement execution date rather than from the actual disbursement date. Additionally, interest was sometimes charged from the date of the cheque for loans disbursed via cheque, despite the cheque being handed over to the customer several days later.
Levying interest for the entire month in cases of mid-month loan disbursal or repayment, rather than for the actual duration the loan remained outstanding.
Gathering a number of installments in advance so that the interest for the entire amount of the loan can be calculated.
RBI has seriously expressed its concern over non-standard interest charging practices that deviate from the principles of fairness and transparency in customer dealings. Supervisory teams of the RBI have cautioned banks, NBFCs, and housing finance companies to refund all excess interest and other charges to affected customers.
RBI is encouraging lenders to opt for online account transfers instead of issuing cheques in certain cases of loan disbursal
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