The regulator said the quantum of charges should be proportionate to default, for which threshold has to be determined by regulated entities. “The quantum of penal charges shall be proportional to defaults/non-compliance of material terms and conditions of loan contract beyond a threshold. This threshold is to be determined by the regulated entities and shall not be discriminatory within a particular loan/product category,” the draft norms said.
The RBI has said penal charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest.
The RBI said it has observed that many REs use penal rates of interest, over and above the applicable interest rates, in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned.
“There shall be no capitalisation of penal charges, ie, no further interest computed on such charges,” the draft said.
The regulated entities should ensure that there is a clearly laid down board-approved policy on penal or similar charges on loans, by whatever name called, the RBI said.
Feedback on the draft norms can be sent by May 15, 2023.
“These instructions shall come into effect from a date to be indicated in the final circular and regulated entities may carry out appropriate revisions in their policy framework and ensure implementation from the effective date,” the draft norms said.