The Reserve Bank of India (RBI) has issued a directive aimed at ensuring fairness and transparency in the charging of interest by lenders. This directive, titled “Fair Practices Code for Lenders – Charging of Interest,” addresses concerns regarding various unfair practices observed during the onsite examination of regulated entities (REs) for the period ended March 31, 2023.
1. Background on Fair Practices Code: The Fair Practices Code, introduced in 2003, emphasizes fairness and transparency in lending practices while granting sufficient autonomy to REs in setting loan pricing policies.
2. Instances of Unfair Practices: The RBI identified several instances of unfair practices in interest charging by lenders. These include:
- Charging interest from the date of loan sanction or execution of the loan agreement, rather than from the actual disbursement date.
- Charging interest for the entire month, even in cases of partial loan disbursal or repayment during the month.
- Collecting advance instalments but applying interest on the full loan amount.
3. Supervisory Actions by RBI: Upon uncovering these practices, the RBI advised REs to refund excess interest and charges to customers. Additionally, REs are encouraged to adopt online account transfers for loan disbursals, minimizing delays associated with cheque issuance.
4. Directive for Corrective Action: The RBI directive mandates all REs to review their loan disbursal practices, interest application methods, and other charges. REs are instructed to implement necessary system-level changes to address the identified issues promptly.
*****
Reserve Bank of India
RBI/2024-25/30
DoS.CO.PPG.SEC.1/11.01.005/2024-25
April 29, 2024
All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks) excluding Payments Banks
All Primary (Urban) Co-operative Banks/ State Co-operative Banks/
District Central Co-operative Banks
All Non-Banking Financial Companies (including Microfinance Institutions and Housing Finance Companies)
Madam / Dear Sir,
Fair Practices Code for Lenders – Charging of Interest
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 REs as regards their loan pricing policy.
2. 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. Some of the unfair practices observed are briefly explained below:
a. 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 the funds to the customer. Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later.
b. 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 charging interest only for the period for which the loan was outstanding.
3. 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. These 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. REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal.
4. Therefore, 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 highlighted above.
5. This circular takes immediate effect.
Yours faithfully,
(Tarun Singh)
Chief General Manager
