The RBI has instructed banks to stop charging additional interest on loans following an investigation that revealed unjust practices.

In a move to protect the interests of customers, the Reserve Bank of India (RBI) has recently issued a circular to banks and non-banking financial companies (NBFCs) to review and ensure fairness and transparency in their practices of charging interest. This decision was prompted by the discovery of several cases where customers were charged excessive interest on their loans.

During their on-site examination of regulated entities for the period ending on March 31, 2023, the RBI uncovered certain unfair practices in the charging of interest. In order to promote fairness and transparency, the RBI has directed all regulated entities to review their practices regarding the disbursement of loans, application of interest, and other charges. They have been advised to take necessary corrective action, including making system-level changes, to address the issues that have been highlighted.

Some of the unfair practices that the RBI has observed include charging interest from the date of sanction or execution of the loan agreement, rather than from the actual date of disbursal of funds to the customer. They also found instances where interest was being charged from the date of the cheque, even though the customer received the cheque several days later. Additionally, some banks were charging interest for the entire month, instead of only for the period that the loan was outstanding. There were also cases where banks were collecting advance installments, but still calculating interest on the full loan amount.

The RBI has expressed serious concern over these non-standard practices of charging interest, as it goes against the principles of fairness and transparency when dealing with customers. In cases where such practices have been identified, the RBI has advised banks, NBFCs, and housing finance companies to refund any excess interest and charges to their customers. They have also encouraged the use of online account transfers instead of issuing cheques for loan disbursal.

In conclusion, the RBI's circular serves as a reminder to all regulated entities to review and improve their practices to ensure fairness and transparency in their dealings with customers. This step will not only protect the interests of customers but also promote a more ethical and responsible lending environment.

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