RBI warns banks over 'unfair practices' in charging interest on loan

The Reserve Bank of India (RBI) has issued a notification against banks indulging in certain "unfair practices" when it comes to the charging interest on loans, saying that they can't levy interest from the date of loan sanction.

The notification, issued for all commercial banks excluding payments banks, primary co-operative banks, district central c-operative banks and NFBCs, says some of the "non-standard practices" of charging interest do not align with the spirit of fairness and transparency.

Dubbing them a "serious concern", the RBI says: "Wherever such practices have come to light, RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers."

The central bank is also encouraging the regulated entities to use "online account transfers" in place of cheques being issued in a few cases for loan disbursal.

The RBI says all regulated entities must "review" practices regarding the mode of disbursal of loans, application of interest and other charges and take corrective action, with immediate effect.

The RBI had conducted an onsite probe into the matter for the period ended March 31, 2023, in which it came across many instances where banks and other financial institutions resorted to key "unfair practices" when it comes to charging interest from consumers.

These unfair practices 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. In the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding. In some cases, it was observed that REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest."

The central bank says these and other "non-standard practices" of charging interest do not agree with the "spirit of fairness and transparency" while dealing with customers.

Master direction to ETPs

After its developmental and regulatory policies announcement on February 8, 2024, the RBI has now placed on its website Draft Master Direction for electronic trading platforms (ETPs), while seeking comments from the stakeholders. These directions have been issued to the entities operating as ETPs on which transactions in eligible instruments are contracted. They say no entity, resident or non-resident, will operate an "ETP" without obtaining prior authorisation of, or having registered with, the RBI.

Regarding eligible instruments, authorised ETP will ensure that transactions only in approved instruments are contracted on their platform. Existing ETPs that need registration under these directions will make an application in three months but may continue to operate until a decision on the application.