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The Reserve Bank has extended the new rules on loan account penalty charges for banks and non-bank financial companies (NBFCs) until April 1, 2024, as part of fair lending practices. Regulated entities, including banks and NBFCs, must ensure compliance with these rules for new loans starting April 1, 2024. For existing loans, the transition to the new punitive charges regime should take place on or after April 1, 2024, but no later than June 30, 2024.

FAQs released by the RBI on January 15, 2024, provide insights into fair lending practices related to penal charges in loan accounts. Notable points include the absence of a specified cap for penal charges, emphasizing that these charges should be reasonable and commensurate with non-compliance with loan contract terms. The guidelines clarify that interest charged during default, including unpaid EMIs, should not be treated as penal interest but as regular/overdue interest. Additionally, there is flexibility for regulated entities to have different penal charges within the same product category based on the loan amount, provided they are reasonable and commensurate.

Uniformity in the structure of penal charges within a specific loan/product category is required, regardless of the borrower’s constitution (individual & non-individual). The FAQs highlight that additional penal charges cannot be imposed on the earlier outstanding amount. The instructions on penal charges apply to all credit facilities, except those explicitly exempted.

Disclosure of the quantum and reason for penal charges is emphasized, stating that a mere reference to the schedule on the website is not sufficient. The FAQs address the applicability of GST on penal charges, directing compliance with instructions issued by the Central Board of Indirect Taxes & Customs (CBIC). Lastly, the prescribed instructions on penal charges do not apply to rupee/foreign currency export credit and other foreign currency loans.

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