RBI asks lenders to be fair and transparent in dealing with borrowers

Reserve Bank of India (RBI) has asked lenders to be transparent in their dealings with borrowers and show fairness while charging interest on loans, even as they enjoy complete freedom in the pricing of loans. 

The Fair Practices Code issued by RBI to various regulated entities (REs), including banks and NBFCs, inter-alia, calls for fairness and transparency in charging of interest by the lenders, while providing the necessary freedom to REs in deciding the rate of interest on loans.

RBI’s new directive comes after RBI noticed instances of lenders resorting to certain unfair practices in charging of interest.  

RBI said, the onsite examination of REs for the period ended 31 March 2023 revealed unfair practices like charging of interest from the date of sanction of loan or date of execution of loan agreement rather than from the date of actual disbursement of the funds. 

Similarly, in the case of loans being disbursed by cheque, it was noted that interest was charged from the date of the cheque and not the date of handing over the cheque to the borrower, which in most cases are several days later.

RBI has advised lenders to use online account transfers in lieu of issuing cheques for loan disbursal.

Also, in cases of disbursal or repayment of loans, some lenders charge interest for the whole month rather than for the completed days of that particular month.

RBI also said that in some cases lenders collect one or more instalments in advance but charge interest for the whole amount of the loan.

RBI said such practices are not in consonance with the spirit of fairness and transparency. RBI’s supervisory teams have also advised REs to refund such excess interest and other charges to customers.