Banking News

reserve bank of india: Banks want norm barring penal interest rate deferred by three months


Banks have approached the Reserve Bank of India (RBI), seeking deferral of a guideline that prevents them imposing penal interest rates on non-compliant borrowers by three months to the next financial year.

The guideline, issued by the RBI in August, mandates banks to levy a charge and not raise interest rate of a borrower who fails to meet the terms and conditions of a loan contract from January 1, 2024.

Lenders argued in a representation to the RBI earlier this month that penal interest rates lead to better credit discipline. They also said they needed time to reconfigure their internal systems.

“We need more time to reconfigure our internal systems to adhere to guidelines, and accordingly, a representation was made to the regulator earlier this month,” an executive of a leading public sector bank said on condition of anonymity.

He said some banks argued that penalties should be levied only through additional interest as it leads to better credit discipline.

Banks increase the interest rate for non-compliant borrowers by 2-3% or even more on a case-by-case basis. The regulator viewed this practice as a revenue enhancement tool and therefore directed banks to levy only “reasonable” penal charges in cases of default in the repayment of loans.

Banks Want Norm Barring Penal Interest Rate Deferred by 3 Mths

Through its notification on ‘Fair Lending Practice – Penal Charges in Loan Accounts’, the RBI directed banks to adhere to the new guidelines from January next year. Banks now want this to be extended to the next financial year.”We understand that the RBI is looking to protect the customers, but a one-time penalty may not be a deterrent,” said the executive.

The regulator said while issuing the revised guidelines in August that supervisory reviews of banks had highlighted divergent practices about the levy of penal interest or charges leading to customer grievances and disputes.

The lenders have also sought greater clarity in respect of penal charges applicable to stressed accounts, on account of uncertainty with regard to recovery, said people aware of the matter. They have also flagged the issue of levy of goods and services tax (GST) on penalty.

Another bank executive said there were issues with the application of GST on penalties in stressed accounts. “The GST liability should be applicable to banks in such cases only on realisation. Since there is ambiguity on this matter, we have sought more clarity,” he said.

As per the existing norms, penalties levied by way of interest are not subject to GST and are considered an exempt income for banks. However, the penal charges to be levied are subject to GST.


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