Key Points
The new guidelines have come after it has been observed that many banks use penal rate of interest, over and above the applicable interest rates, in case of defaults / non-compliance by the borrower with the terms on which credit facilities were sanctioned..
As per the circular issued, penalty, if charged, for non-compliance with terms and conditions of a loan contract by the borrower shall be treated as penal charges and shall not be levied in the form of penal interest that is added to the rate of interest charged on the advances..
The amount of penal charges shall be reasonable and commensurate with non-compliance with the terms and conditions of the loan contract without being discriminatory within a particular loan or product category...
The penal charges in case of loans sanctioned to individual borrowers, for purposes other than business such as home loans, personal loans etc, shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance of terms and conditions of the loan contract...
As per the RBI, the intent of levying penal interest or charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest..
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