RBI asks lenders to follow fair practices, refund excess charges to borrowers

Concerned over some banks and lenders resorting to unfair practices in charging of interest, the Reserve Bank of India (RBI) on Monday directed them to take corrective action and refund excess charges to customers.

RBI's direction to lenders

The guidelines on Fair Practices Code issued to various regulated entities (REs) since 2003, inter-alia, advocate fairness and transparency in charging of interest by the lenders, while providing adequate freedom to them as regards loan pricing policy.

"During the course of the onsite examination of REs for the period ended March 31, 2023, the Reserve Bank came across instances of lenders resorting to certain unfair practices in charging of interest," the RBI said in a circular.

The central bank has also highlighted certain unfair practices being followed by certain lenders.

"...in the interest of fairness and transparency, all REs are directed to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system level changes, as may be necessary, to address," the issues concerning charging of interest, the circular said.

During onsite examinations of REs, the RBI said it observed 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 funds to the customer.

It also came across instances where interest was charged from the date of the cheque whereas it 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 only for the period for which the loan was outstanding, the RBI said.

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 RBI further said unfair practices and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers.

"These are matters of serious concern to the Reserve Bank. 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 circular said.

REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal, it added.

The circular takes immediate effect, the central bank added