Reserve Bank of India (RBI) has come across instances of
lenders resorting to certain unfair practices in charging of excess interest from borrowers.
The RBI, through its supervisory teams, has
advised banks to refund such excess interest and other charges to customers.
THE UNFAIR PRACTICES
- Banks were charging of interest from the date of sanction of loan or date of execution of loan agreement, and not from the date of actual disbursement of the funds to the customer.
- Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later, the RBI said.
- In the case of disbursal or repayment of loans during the course of the month, some banks were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
- It was also observed that banks were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.
THE RBI DIRECTIVE
In a circular issued on
Monday (April 29), the RBI directed banks and NBFCs to
review their practices regarding mode of disbursal of loans, application of interest and other charges and
take corrective action, including system level changes, as may be necessary, to address the issues highlighted by the RBI.
This is in the interest of
fairness and transparency, the RBI said.
Through its supervisory teams, it has
advised banks to refund such excess interest and other charges to customers.
RBI POLICY ON INTEREST RATES
The guidelines on
Fair Practices Code, issued to various
Regulated Entities (REs) like banks and NBFCs since 2003, advocate
fairness and transparency in charging of interest by the lenders,
while providing adequate freedom to banks as regards their loan pricing policy.
DO BANKS INFORM BORROWERS IN CASE OF CHANGES IN INTEREST RATES?
- A major complaint of borrowers is that banks don’t inform them properly about the change in interest rates.
- At the time of sanction, banks are supposed to clearly communicate to the borrowers about the possible impact of change in benchmark interest rate on the loan leading to changes in EMI and/or tenor or both.
- Subsequently, any increase in the EMI/tenor or both on account of the above should be communicated to the borrower immediately through appropriate channels.
- At the time of reset of interest rates, REs should provide the option to the borrowers to switch over to a fixed rate as per their Board approved policy.
Test your understanding
Questions from this article
Prelims practiceWith reference to RBI Ordered Banks To Refund Excess Interest, consider the following statements:
- Banks were charging of interest from the date of sanction of loan or date of execution of loan agreement, and not from the date of actual disbursement of the funds to the customer.
- Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later, the RBI…
- In the case of disbursal or repayment of loans during the course of the month, some banks were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
Which of the statements given above are correct?
- 1 and 2 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
View answer
Answer: (d) 1, 2 and 3. All three statements are drawn from the article.
Mains practiceDiscuss the background, key issues and significance of RBI Ordered Banks To Refund Excess Interest for India.
Answer in 250 words.
View answer approach
- THE UNFAIR PRACTICES
- DO BANKS INFORM BORROWERS IN CASE OF CHANGES IN INTEREST RATES?
- Background and context
- Key facts and institutional framework
- Significance and way forward
Frequently asked questionsFrequently asked questions
Why is Rbi Ordered Banks To Refund Excess Interest in the news?
Reserve Bank of India (RBI) has come across instances of lenders resorting to certain unfair practices in charging of excess interest from borrowers. The RBI, through its supervisory teams, has advised banks to refund such excess interest and other charges to customers.
What are the key facts about Rbi Ordered Banks To Refund Excess Interest?
THE UNFAIR PRACTICES Banks were charging of interest from the date of sanction of loan or date of execution of loan agreement, and not from the date of actual disbursement of the funds to the customer. Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later, the RBI said. In the case of disbursal or repayment of loans during the course of the month, some banks were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
Why is Rbi Ordered Banks To Refund Excess Interest important for UPSC preparation?
The topic connects current developments with Economy, International Relations, Polity & Governance and is relevant for both objective revision and analytical answer writing.