Banks seek RBI's nod to defer penal interest guideline by 3 months
New Delhi, Dec 19, 2023
The RBI issued guidelines instructing banks to levy charges rather than increase the interest rate for borrowers who fail to meet the terms and conditions of a loan contract starting January 1, 2024
Indian banks have approached the Reserve Bank of India (RBI) requesting a three-month deferral of guidelines that prohibit the imposition of penal interest rates on non-compliant borrowers until the next financial year, according to a report by The Economic Times (ET). The RBI issued this guideline in August, instructing banks to levy charges rather than increase the interest rate for borrowers who fail to meet the terms and conditions of a loan contract starting January 1, 2024.
Banks typically raise interest rates for non-compliant borrowers by 2-3 per cent or more on a case-by-case basis. However, the RBI sees this practice as a revenue enhancement tool and has directed banks to impose only "reasonable" penal charges in cases of loan repayment default.
Lenders argue that penal interest rates contribute to better credit discipline, and they require additional time to reconfigure their internal systems to comply with the guidelines. Some banks propose that penalties should be imposed only through additional interest, asserting that this approach enhances credit discipline.
Through its notification on "Fair Lending Practice – Penal Charges in Loan Accounts," the RBI instructed banks to adhere to the new guidelines starting January next year. Banks are now urging for an extension to the next financial year, beginning on April 1, 2024.
The Reserve Bank, in its August guidelines, mentioned that supervisory reviews revealed diverse practices regarding the levy of penal interest or charges, resulting in customer grievances and disputes.
Banks have also sought greater clarity on penal charges applicable to stressed accounts, expressing uncertainty about recovery. Additionally, concerns have been raised regarding the levy of goods and services tax (GST) on penalties. Bank executives argue that GST liability should apply to banks in such cases only upon realisation, seeking clearer guidelines in this regard.
Under existing norms, penalties levied by way of interest are exempt from GST and considered exempt income for banks. However, the penal charges themselves are subject to GST.
While acknowledging the RBI's objective to protect customers, an executive from a leading public sector bank suggested that a one-time penalty may not serve as a sufficient deterrent, added the ET report.
[The Business Standard]
