The Reserve Bank of India (RBI) has said that banks will not be able to capitalize penal charges levied on loan defaults. This means that this fee will be charged separately and will not be added to the outstanding principal amount.
This step of the central bank will help in curbing the additional interest levied on the customers in case of loan default. In its draft circular on ‘Fair Lending Activities – Penal Charges in Loan Accounts’, the quantum of penal charge should be commensurate with the extent of default/non-compliance of material terms and conditions of the loan agreement. Under the extant RBI guidelines, lenders have the freedom to implement a board approved policy for recovery of penal charges.
The central bank has now issued a draft to streamline these activities. The draft states that the purpose of imposing penal charges is to inculcate a sense of credit discipline among the borrowers and to provide fair compensation to the lender.
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It further said that penal charges are not a means of earning over and above the contracted interest rate.
