RBI to Banks: No Interest on Loan Amounts Not Disbursed

The Reserve Bank of India (RBI) recently issued a warning to banks and other lending institutions to ensure they are not charging interest on loan amounts that customers have not yet received. This warning comes after the RBI noticed that some lenders were starting to calculate interest from the date a loan was approved, rather than from the date the loan was actually given to the customer. This practice results in extra costs for borrowers, as they end up paying interest on money they haven’t yet received.

Another issue is that some lenders charge interest from the date they issue a cheque, even if the borrower hasn’t deposited or cashed it yet. This could lead to borrowers paying interest on money they haven’t accessed, which is unfair.

Similarly, the RBI found cases where banks and Non-Banking Financial Companies (NBFCs) charged customers interest for a full month, even if the loan was repaid partway through the month. This leads to customers paying more than necessary.

The RBI also identified cases where lenders collected advance instalments from customers but still charged interest on the full loan amount, even though the customers hadn’t received or used the entire loan amount. For instance, if someone borrows Rs10,000 and repays Rs2,000 in advance, they should only be charged interest on the remaining Rs8,000. However, some lenders still charge interest on the full Rs10,000, leading to overcharging.

These practices violate the spirit of fairness and transparency, which the RBI had set out in its 2003 guidelines on the Fair Practices Code. Although these guidelines allow banks some flexibility in setting their interest rates, they must adhere to principles of fairness. By issuing this warning, the RBI is reminding lenders to treat customers fairly and avoid practices that could result in them paying more than they should.