RBI on Monday warned lenders to not levy interest from the date of loan sanction, instead of actual disbursement. In a home loan or other loans, there is often a lag between sanction and disbursement and charging it from the date of sanction imposes additional interest cost on the borrower.
Charging interest from the date of loan sanction or loan agreement execution rather than from the date of actual disbursement is a violation of fair lending practices norms.Customers end up paying interest on money they haven’t received, which inflates the cost of borrowing. Second, in the case of loans disbursed by cheque, charging interest from the date of the cheque rather than when it’s cashed or deposited can lead to customers being charged for funds they haven’t accessed. These practices result in customers paying more than they should for borrowing money and eroding trust in the lending institution. Similarly, RBI said it had come across instances where banks or NBFCs were levying interest for the entire month even if the loan was disbursed or repaid within the month. Again, customers end up paying more interest than they should, as they are being charged for days when the loan has already been repaid.
Besides, they were collecting advance instalments while still charging interest on the full loan amount.
Recovering interest on full loan amounts, even in cases where the instalment was paid in advance, results in overcharging, as customers are paying interest on loan amounts they have not received or utilized. For example, if a customer takes out a loan of Rs10,000 and the repayment schedule requires monthly instalments over a period of 12 months, the lender collects two instalments in advance, totalling Rs2,000, at the time of loan disbursement. Despite only receiving Rs 8,000, the lender calculates interest charges based on the full Rs 10,000 loan amount.
According to RBI, the 2003 guidelines on the Fair Practices Code advocate fairness and transparency in charging interest rates. However, these do not prescribe any standard practice with the objective of providing adequate freedom to lenders regarding their loan pricing policy.
In its letter, RBI said that non-standard practices of charging interest “are not in consonance with the spirit of fairness and transparency”.
Charging interest from the date of loan sanction or loan agreement execution rather than from the date of actual disbursement is a violation of fair lending practices norms.Customers end up paying interest on money they haven’t received, which inflates the cost of borrowing. Second, in the case of loans disbursed by cheque, charging interest from the date of the cheque rather than when it’s cashed or deposited can lead to customers being charged for funds they haven’t accessed. These practices result in customers paying more than they should for borrowing money and eroding trust in the lending institution. Similarly, RBI said it had come across instances where banks or NBFCs were levying interest for the entire month even if the loan was disbursed or repaid within the month. Again, customers end up paying more interest than they should, as they are being charged for days when the loan has already been repaid.
Besides, they were collecting advance instalments while still charging interest on the full loan amount.
Recovering interest on full loan amounts, even in cases where the instalment was paid in advance, results in overcharging, as customers are paying interest on loan amounts they have not received or utilized. For example, if a customer takes out a loan of Rs10,000 and the repayment schedule requires monthly instalments over a period of 12 months, the lender collects two instalments in advance, totalling Rs2,000, at the time of loan disbursement. Despite only receiving Rs 8,000, the lender calculates interest charges based on the full Rs 10,000 loan amount.
According to RBI, the 2003 guidelines on the Fair Practices Code advocate fairness and transparency in charging interest rates. However, these do not prescribe any standard practice with the objective of providing adequate freedom to lenders regarding their loan pricing policy.
In its letter, RBI said that non-standard practices of charging interest “are not in consonance with the spirit of fairness and transparency”.
