The Reserve Bank has banned arbitrary charges levied by banks and financial institutions in case of default in loan installments. This change was going to come into effect before the first date of the new year. Now customers will have to wait some more.
The arbitrariness of banks will stop
In fact, many cases were being reported of banks and NBFCs charging arbitrary fees and interest etc. to the customers on repayment of loan installments.
In view of these developments, the regulator Reserve Bank of India devised a measure to curb intrusive arbitrariness. Customers will get a lot of benefits now that the Central Bank has completely clarified the situation regarding the charges to be levied in case of default.
Change was going to happen from January itself
This change was going to come into effect from the beginning of the new year, i.e. from the first of January 2024. Customers will now have to wait for a few days. The Reserve Bank has informed about extending the time for this.
Now banks and NBFCs will have to follow the changed rules for new loans from April 1. Whereas those with old loans have been asked to implement the new system before June 30, 2024.
The circular clarified the matter
In August 2023, the Reserve Bank had issued a circular clarifying the charges to be levied in case of default. The Central Bank explained how banks, NBFCs and other institutions can collect the levy.
The Reserve Bank said that the purpose of charging penal interest or penal charges in case of default in payment of loan installments was to create discipline by giving credit to people.
Interest will not have to be paid on penalty
Now the Reserve Bank has clarified that banks will have to be closed if they charge penal interest. Now the name of levy will be only penal charges. This means that now there will be no interest penalty in case of default.
Customers will benefit from this as the penal penalty will be reduced by paying as interest, i.e. compounding on penalty will not have to be paid. Banks often charged punitive interest many times the principal amount of the loan that would have been prevented.