oppn parties RBI Clamps Down On Excessive Penalty Being Levied For Late Repayments By Borrowers

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RBI Clamps Down On Excessive Penalty Being Levied For Late Repayments By Borrowers

By Sunil Garodia
First publised on 2023-02-09 08:47:18

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Author of Cyber Scams in India, Digital Arrest, The Money Trap and The Human Hack

The RBI has taken cognizance of the unhealthy practice of banks and other financial institutions to levy unreasonable penalty and upward revision of interest rates if borrowers fail to pay their commitments in time. It has categorically stated that the regulations governing this were put in place not to add an income stream for the financial institutions and banks but to instill discipline among borrowers. The apex bank said that it has received many complaints against banks and others to the effect that they were charging usurious amounts as penalty and also adding one or more percentage point to the interest being charged for the loan. Hence, the RBI said that it was issuing new guidelines in the matter to ensure that the penalty charged was reasonable and transparent and no top-up was made to the interest rate being charged.

It has been seen that many banks and financial institutions, apart from correctly charging for cheque or ECS mandate bouncing charges, levy a penalty which can go up to 100% of the EMI in default even if the sum is paid in the next few days. This is in addition to the matter being reported to rating agencies which results in the lowering of the credit profile of the borrower. Hence, it becomes a multi-edged sword which cuts the borrowers from all sides. The RBI has said that it has found that the practices were not uniform across the financial sector and some banks and institutions were charging excessively.

While banks and financial institutions are within their rights to penalize habitual defaulters they must recognize that a single default for a few days or a few similar defaults spread over a longerperiod can be due to various reasons beyond the control of the borrowers. They must be lenient on this score as long as the payment is received in a few days. Moreover, any such penalty must be reasonable and uniform across the sector and must be transparent. The RBI has said that it will now ensure that no top-up of interest rates happen if a penalty is levied. This is welcome. 

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