The Reserve Bank on Wednesday issued various guidelines to regulated entities (REs) to ensure fair and transparent disclosure of penalty interest.
Under the guidelines, lending institutions have the autonomy to frame a board-approved policy for levying penal rates of interest.
However, the RBI said it has been observed that many REs use penal rates of interest, over and above the applicable interest rates, in case of non-compliance or non-compliance by the borrower with the terms and conditions on which the credit facilities are extended. were approved.
RBI in its draft said that the intention of levying penal interest/charges is essentially to inculcate a sense of credit discipline through negative incentives among the borrowers and ensure fair compensation to the lender.
It added that penalty charges over and above the contracted rate of interest should not be used as a revenue enhancement tool.
However, supervisory reviews have indicated varying practices among REs with regard to levy of penal interest/charges, which has given rise to customer complaints and disputes.
(This is the breaking story. More to follow)
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.