With a view of upholding transparency and fairness in the lending operation of Regulated entities, On 29^th April 2024, RBI issued a circular regarding the Fair Practices Code for Lenders – Charging of Interest. The circular is effective with an immediate effect.

Who is included in the definition of Regulated Entities (RE(s))?

1. Non-Banking Financial Companies (including Microfinance Institutions and Housing Finance Companies).
2. Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks) excluding Payments Banks.
3. Primary (Urban) Co-operative Banks/ State Co-operative Banks/ District Central Co-operative Banks.

Actionable on the part of RE(s)

1. They shall refund any such excess interest and other charges applied to customers following unfair lending practices.
2. RE’s should encourage the disbursal of loan amounts through online account transfers instead using of cheques.
3. To review their practices regarding the mode of disbursal of loans, application of interest, and other charges.
4. To review practices regarding the mode of disbursal of loans, application of interest, and other charges.
5. To take corrective action which might include system-level changes, as may be necessary, to address such unfair practices issue.

RBI aims to address and eliminate the unfair lending practices observed by it during onsite examinations of REs for the period ending 31^st March 2023.  A few of such unfair practices are:

1. Charging interest starting on the day the loan is approved or agreed upon, instead of on the actual fund disbursement date.
2. Charging interest starts from the date of the cheque while it is handed over to the customer days later.
3. Charging interest for the full month, even on loans that were outstanding for a period of less than one month.
4. RE Collects installments in advance and still applies interest to the entire loan balance.

To cater to all such unfair lending practices RBI has issued this circular with a view of safeguarding customer’s interests and ensuring fair and transparent lending practices in the economy.

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Amisha Garg