RBI: RBI found that interest was being collected from the day of the loan agreement. Whereas it should have been that interest should be charged from the date of disbursement.
RBI: Expressing concern over the unfair practices adopted by some banks and financial institutions in charging interest, the Reserve Bank of India (RIB) directed them to take corrective steps and refund the excess charges. The guidelines issued on Fair Practices Code for Financial Institutions (RE) under the purview of RBI have advocated fairness and transparency in charging interest by lenders along with giving adequate freedom in relation to loan pricing policy.
Orders will come into effect with immediate effect
The Central Bank issued a circular in this regard and said that its instructions will come into effect with immediate effect. During the physical inspection of regulated entities for the period ending March 31, 2023, the Reserve Bank found instances of lenders resorting to certain unfair practices in charging interest, RBI said in the circular. The central bank has directed all units to review their practices regarding loan disbursement methods, interest charges and other charges and take steps such as systemic changes, if necessary.
Interest was being collected from the day of loan agreement
RBI said that investigation of banks and other lenders found that in many places, interest is being charged from the date of loan sanction or execution of loan agreement and not from the date of actual disbursement of funds to the customer. There were also cases where interest was charged from the date of the cheque, while the check was handed over to the customer several days later.
Interest from date of disbursement
RBI said that in case of disbursement or repayment of loans during the month, some institutions were charging interest for the entire month instead of the outstanding period. In some cases, banks were depositing one or more installments in advance but were calculating the entire loan amount to recover interest. RBI said that such unfair practices and non-standard activities of charging interest are not in keeping with the spirit of fairness and transparency while dealing with customers.
Describing this as a matter of serious concern, RBI said, regulated entities are advised to return the additional interest and other charges so charged to the customers. The central bank said that instead of issuing checks for loan disbursement, banks are being encouraged to use online transfer of funds to the account.
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