RBI directs lenders to rectify unfair practices, refund excess charges

The Reserve Bank of India (RBI) has issued a directive to banks and lenders to rectify unfair practices related to the charging of interest and refund excess charges to customers. Concerns were raised over some institutions resorting to unfair practices during the charging of interest, prompting the RBI to take corrective action.

Guidelines on Fair Practices Code, issued to various regulated entities (REs) since 2003, stresses fairness and transparency in interest charging by lenders. However, during onsite examinations, the RBI identified instances of unfair practices in interest charging.

Some unfair practices highlighted by the RBI include charging interest from the date of loan sanction or execution of the loan agreement rather than from the date of actual disbursement of funds to the customer. Additionally, interest was observed to be charged from the date of the cheque issuance, despite being handed over to the customer several days later.

Moreover, some lenders were found charging interest for the entire month, even if the loan was disbursed or repaid during the month. Others collected advance instalments but considered the full loan amount for interest calculation.

The RBI expressed serious concern over such practices, stating that they are not aligned with the principles of fairness and transparency in customer dealings. As a result, the RBI has advised REs to refund excess interest and other charges to affected customers.

REs are also encouraged to adopt online account transfers instead of issuing cheques for loan disbursals. The circular issued by the RBI takes immediate effect, signaling the urgency of addressing these unfair practices.

The directive underscores the RBI's commitment to ensuring fair and transparent practices in the banking and lending sector, prioritizing customer protection and integrity in financial dealings.

(With PTI inputs)