RBI Implements New Rules on Loan Penalties and Risk Weightage for Personal Loans from April 2024

The Reserve Bank of India (RBI) has recently introduced several key regulations affecting loans, which will come into effect from April 1, 2024. These regulations aim to promote fairness and transparency in lending practices.

One major change is the prohibition of penal interest on loan defaults. Instead, any penalties for non-compliance with loan terms will be treated as "penal charges" rather than additional interest. This measure is designed to prevent lenders from using penal charges as a revenue generation tool. Penal charges must be reasonable, transparent, and commensurate with the level of non-compliance, and they should be clearly disclosed in loan agreements and prominently displayed on the lender’s website .

Additionally, the RBI has raised the risk weightage for personal loans, which will likely result in higher interest rates for borrowers. Lenders now need to maintain higher capital reserves for these unsecured loans, leading to increased costs that will be passed on to customers through higher EMIs. This change is expected to increase personal loan interest rates by up to 1.5% .

These new rules also mandate that banks and NBFCs formulate a Board-approved policy on penal charges, ensuring that charges for individual borrowers do not exceed those for non-individual borrowers facing similar non-compliance. Moreover, the RBI has barred banks from penalizing accounts that have been inactive for more than two years, aiming to protect customers with dormant accounts from unnecessary charges .


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