Lenders Overcharging Borrowers On Loan Interest Rates! RBI Steps In, Check details

Of late, the RBI has been taking measures to ensure that banks don’t indulge in unfair lending practices while giving loans to consumers.
RBI has been taking measures to ensure that banks don’t indulge in unfair lending practices while giving loans to consumers.
RBI has been taking measures to ensure that banks don’t indulge in unfair lending practices while giving loans to consumers.

The Reserve Bank of India (RBI) instructed banks, non-bank financial companies (NBFCs), and other financial institutions to check their practice of imposing interest charges on loans they disburse. They did this because they found out that some lenders were engaging in unfair practices when charging interest on loans. In a notification on April 29, 2024, RBI pointed out some instances of unfair practices followed by banks and other financial institutions are here as follows:

  • Charging interest from the date the loan is approved or the agreement is signed, rather than from when the money is given to the customer.

  • For loans given by cheque, there were instances when interest was charged from the cheque date, even when the customer received the cheque several days later.

  • When loans were given out or repaid within a month, some financial institutions were charging interest for the entire month instead of only for the time the loan was active.

  • In some instances, it was seen that financial institutions were collecting one or more installments in advance but collecting interest based on the entire loan amount.

The RBI found out about the unfair lending practices during the onsite examination of banks conducted for the period ending on March 31, 2023.

What RBI Asked Banks To Do: The RBI has asked banks to refund any extra interest and other charges to customers. “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,” the RBI said. The RBI also asked banks to give out loans online instead of issuing cheques. Moreover, the RBI told all banks and NBFCs to check how they give out loans, charge interest, and apply other fees. They should also address any issue, including system-level changes, as may be necessary.

Interest Charge Timing: “Some banks charge interest from the date of the loan approval or agreement rather than the loan sanction. This means if there's a delay between when you sign for a loan and when you receive the money, you shouldn't be paying interest for that waiting period,” Adhil Shetty, CEO, BankBazaar said.

Interest Calculation On Disbursed Funds: “Where loans are disbursed via cheque, some banks charge interest from the date the cheque is issued, not when the cheque is cashed. This can unfairly increase the amount of interest you pay if there’s a delay in accessing the funds from the cheque,” Shetty said.

Proportional Interest Charges: The RBI observed that some lenders charge interest for an entire month even if the loan wasn’t outstanding for the whole month. Ideally, interest should only be calculated for the number of days the loan amount is held during the month.

Advance Instalment & Interest Calculation: In some cases, consumers have been required to pay one or more equated monthly installments (EMIs) in advance. Yet the interest was still calculated on the full loan amount as though these payments hadn’t been made. This practice can lead to paying more interest than necessary.

When the interest is charged earlier than when the borrower accesses the funds, it means that there's an extra interest that they're required to pay. This may be for a short time, maybe a few days, but it also has the potential to be for a couple of months. In cases of large loans like home loans, the interest accrued could be a very big amount.

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