RBI directs lenders to follow good practices, says refund excess charges to customers

Good lending practices: Expressing concern over a few financial institutions and lenders indulging in unfair practices including charging of interest, the Reserve Bank of India (RBI) on Monday directed them to take corrective action and refund excess charges to customers.
In a recent circular, the RBI had underscored that there was a need of transparency in the lending practices of regulated entities (REs). The guidelines of the central bank, which have been in place since 2003, aim to ensure that borrowers are treated fairly while providing REs with the necessary flexibility in loan pricing policies.
However, during onsite examinations conducted up to March 31, 2023, the RBI identified instances of unfair practices in the charging of interest by certain lenders. Notably, it was observed that interest was being charged from the date of loan sanction or agreement execution, rather than from the actual disbursal of funds to the customer. 
Additionally, interest was being levied from the date of the cheque issuance, even if the funds were handed over to the customer several days later.

Excess Interest Charge 

Another concern highlighted by the RBI was the charging of interest for the entire month, regardless of the actual period for which the loan remained outstanding. Besides, some REs were found to be collecting advance installments while calculating interest based on the full loan amount, which was deemed inconsistent with fairness and transparency principles.
In response to these findings, the RBI has directed all REs to review their loan disbursal practices, application of interest, and other charges. Corrective actions, including system-level changes, are to be implemented promptly to address the identified issues. Additionally, REs are urged to transition towards online account transfers for loan disbursals instead of relying on cheque issuance in certain cases.
The circular emphasises that unfair practices in charging interest are not aligned with the principles of fairness and transparency in customer dealings. As a result, the RBI has advised REs to refund any excess interest and charges to affected customers. The central bank has also stressed the seriousness of these concerns and highlighted the immediate effect of the circular.
In conclusion, the RBI's directive underscores the importance of maintaining fairness and transparency in lending practices, and it calls for swift action from REs to rectify any identified shortcomings.