{"id":36901,"date":"2023-08-18T06:23:09","date_gmt":"2023-08-18T00:53:09","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=36901"},"modified":"2025-04-22T09:03:14","modified_gmt":"2025-04-22T03:33:14","slug":"fair-lending-practice-penal-charges-in-loan-accounts","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/fair-lending-practice-penal-charges-in-loan-accounts\/","title":{"rendered":"Fair Lending Practice-Penal Charges in Loan Accounts"},"content":{"rendered":"<h3><strong>What\u2019s in today\u2019s article?<\/strong><\/h3>\n<ul>\n<li><strong>Why in News?<\/strong><\/li>\n<li><strong>About the Modified Norms<\/strong><\/li>\n<li><strong>Other Highlights of the Modified Norms<\/strong><\/li>\n<li><strong>Impact on Consumers<\/strong><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Why in News?<\/strong><\/h2>\n<ul>\n<li>Concerned over the practice of banks and Non-Banking Financial Companies (NBFCs) using penal interest as a revenue enhancement tool, the Reserve Bank of India (RBI) came out with modified norms.<\/li>\n<\/ul>\n<p><strong>\u00a0<\/strong><\/p>\n<h2><strong>About the Modified Norms:<\/strong><\/h2>\n<ul>\n<li>The norms were released after the RBI found that many regulated entities (REs) &#8211; lending institutions regulated by the central bank &#8211; <strong>were levying penal rates of interest, over and above the applicable interest rates.<\/strong><\/li>\n<li>According to the RBI notification on <strong>\u2018Fair Lending Practice-Penal Charges in Loan Accounts\u2019<\/strong>, the banks and other lending institutions <strong>will not be allowed to levy penal interest<\/strong> (wef Jan 1, 2024).\n<ul>\n<li>Penal interest is added to the rate of interest charged on the advances.<\/li>\n<\/ul>\n<\/li>\n<li>They would levy only <strong>penal charges <\/strong>in case of defaults or non-compliance by the borrower with the terms on which credit facilities were sanctioned.\n<ul>\n<li><strong>A penal charge<\/strong> is an additional charge a lender levies on a borrower in case of delay in payment of equated monthly installments (EMI) or default or non-compliance of payment contracts.<\/li>\n<li><strong>The quantum of penal charges should be \u201creasonable\u201d<\/strong> and \u201ccommensurate with the non-compliance of loan contract\u201d without being discriminatory within a particular loan\/ product category.<\/li>\n<li><strong>There shall be no capitalisation of penal charges<\/strong> i.e., no further interest computed on such charges.<\/li>\n<li>However, this will not affect the normal procedures for compounding of interest in the loan account.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<figure class=\"media\">\n<div data-oembed-url=\"https:\/\/www.youtube.com\/watch?v=Xe8ovMERkDk\">\n<div><iframe src=\"https:\/\/www.youtube.com\/embed\/Xe8ovMERkDk\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/div>\n<\/div>\n<\/figure>\n<p>&nbsp;<\/p>\n<h2><strong>Other Highlights of the Modified Norms:<\/strong><\/h2>\n<ul>\n<li>Levying penal interest or charges is intended to guarantee that<strong> the lender is fairly compensated <\/strong>as well as <strong>to instill a sense of credit discipline in borrowers through disincentives.<\/strong><\/li>\n<li><strong>The new guidelines are applicable<\/strong> to banks, including small finance banks, regional rural banks, but excluding payments banks, NBFCs, All India Financial Institutions such as Exim Bank, NABARD, SIDBI and NaBFID, etc.<\/li>\n<li><strong>Lenders will have to formulate <\/strong>a board approved policy on penal charges or similar charges on loans.<\/li>\n<li><strong>In the case of existing loans<\/strong>, the switchover to new penal charges regime shall be ensured on next review or renewal date or six months from the effective date of this circular, whichever is earlier.<\/li>\n<li><strong>The modified norms will not apply to<\/strong> credit cards, external commercial borrowings, trade credits and structured obligations which are covered under product specific directions.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Impact on Consumers:<\/strong><\/h2>\n<ul>\n<li><strong>Supervisory reviews<\/strong> have indicated divergent practices amongst the REs with regard to levy of penal interest\/charges leading to customer grievances and disputes.<\/li>\n<li><strong>Now, REs will have to disclose the quantum and reason<\/strong> for penal charges clearly to the customers in the loan agreement and most important terms and conditions\/Key Fact Statement (KFS).<\/li>\n<li><strong>These will also be displayed on the website of REs<\/strong> under interest rates and service charges section.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<hr \/>\n<h3><strong>Q1) What is the National Bank for Financing Infrastructure and Development (NaBFID)?<\/strong><\/h3>\n<p>The NaBFID is a specialised Development Finance Institution set up in 2021 by an Act of the Parliament. It aims to support the country&#8217;s infrastructure sector, which can significantly gain from an enabling credit flow by means of attractive instruments and channelised investment.<\/p>\n<p>&nbsp;<\/p>\n<h3><strong>Q2) What is the difference between banks &amp; NBFCs?<\/strong><\/h3>\n<p>NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences &#8211; NBFC cannot accept demand deposits; NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself; etc.<\/p>\n<p>&nbsp;<\/p>\n<hr \/>\n<p><strong>Source:\u00a0<\/strong><a href=\"https:\/\/www.thehindu.com\/business\/rbi-issues-fresh-guidelines-asking-banks-nbfcs-not-to-levy-penal-interest-on-borrowers-in-case-of-default\/article67210101.ece\" target=\"_blank\" rel=\"nofollow noopener\"><u>RBI issues fresh guidelines asking banks, NBFCs not to levy penal interest on borrowers in case of default<\/u><\/a>\u00a0|\u00a0<a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-economics\/rbi-penal-interest-8898133\/\" target=\"_blank\" rel=\"nofollow noopener\"><u>IE<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>According to the RBI notification on \u2018Fair Lending Practice-Penal Charges in Loan Accounts\u2019, lenders will not be allowed to levy penal interest<\/p>\n","protected":false},"author":5,"featured_media":36902,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-36901","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/36901","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=36901"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/36901\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/36902"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=36901"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=36901"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=36901"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}