Fair lending practice rules: RBI extends deadline by 3 months

The Reserve Bank of India (RBI) on Friday extended the deadline issued to banks related to penal charges being levied on loan accounts and also made some additions to the Payments Infrastructure Development Fund (PIDF) Scheme.

On the matter of fair lending practice, the RBI had earlier set January 1, 2024, as the deadline for regulated entities. But now considering certain clarifications and additional time has been sought by them, the timeline for implementation of the instructions has been extended by three months.

"Accordingly, REs shall ensure that the instructions are implemented in respect of all the fresh loans availed from April 1, 2024, onwards. In the case of existing loans, the switchover to new penal charges regime shall be ensured on the next review or renewal date falling on or after April 1, 2024, but not later than June 30, 2024," says the RBI.

The central bank in August 2023 had tweaked rules related to banks, NBFCs, and all-India financial institutions imposing “penal interest” over and above the “applicable interest” in case of defaults or non-compliance by borrowers. The RBI had said these entities were indulging in "divergent practices" about the levy of “penal interest” or charges, thus leading to a rising number of customer grievances and disputes.

The basic purpose of levying penal interest or charges is to inculcate a "sense of credit discipline", though such charges are not meant to be used as a "revenue enhancement tool" over and above the contracted rate of interest, the RBI said.

Thus, the RBI directed banks that if they charged a penalty for non-compliance with material terms and conditions of the loan contract, it should be treated as ‘penal charges’ and should not be levied in the form of ‘penal interest’, which is added to the rate of interest charged on the advances.

"There shall be no capitalisation of penal charges i.e., no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account," the RBI said.

Enhancements to PIDF Scheme

The RBI today also made enhancements to the existing PIDF Scheme that was extended by two more years in October 2023. The beneficiaries under the PM Vishwakarma Scheme will now also come under the scheme. Eligible installations since the start of the Vishwakarma Scheme, i.e., September 17, 2023, can claim benefits under the PIDF scheme.

The scheme presently subsidises the deployment of acceptance infrastructure based on the category of device – physical or digital. Now other devices soundbox -- providing instant audio payment confirmation along with payment acceptance by “scan & pay” and near field communication (NFC), and Aadhaar-enabled biometric devices – certified biometric scanner devices facilitating Aadhaar authentication for acceptance of payment by merchants through BHIM Aadhaar Pay, will also be eligible for subsidy for installations made from October 01, 2023 onwards.

The amount of subsidy for devices deployed in special focus areas -- North Eastern States, Union Territories of Jammu & Kashmir and Ladakh -- has also been increased from 75% to 90% of the total cost, irrespective of the type of device, for installations made from October 01, 2023 onwards.

The PIDF Scheme was operationalised in January 2021 for three years to boost the deployment of payment acceptance infrastructure such as physical point of sale (PoS), and quick response (QR) codes in tier-3 to tier-6 centres, northeastern states, and UT of Jammu & Kashmir and Ladakh. The beneficiaries of the PM SVANidhi Scheme in Tier-1 and 2 centres were later included in August 2021. As of August 2023, over 2.66 crore new touchpoints have been deployed under the scheme.