banking regulator

Banking Regulator’s New Mercy Directions for Borrowers and Defaulters

The banking regulator RBI recently issued guidelines to limit the power of banks indulged in practices of enhancing their income by placing irrelevant interest charges on borrowers’ accounts. RBI issued guidelines for providing relief to borrowers who are either on the loan default list due to unregulated charges imposed on their accounts.

RBI stated that for all kinds of loans and credit products, penalty charges or interest should be “fair, reasonable, and transparent” and should be notified to the borrower at the time of lending. Such interest charges should not be used as a tool to enhance banks’ revenue or to exploit borrowers through these charges.

Also, the central bank will roll out policies and guidelines for the removal of defaulters listed for defaulting in loan servicing charges. It was decided to replace any form of penal interest required for such loan servicing or non-compliance with loan terms with penal charges.

As per current rules, banks and NBFCs are permitted to charge penal interest on defaults on advances. Due to a separate policy on penal interest and charges, it is resulting in more grievances and disputes between banks with their customers. The provided policy might reduce the revenue of banks but will certainly benefit self-employed and salaried individuals.

It was brought to the notice of banks and institutions charging penal interest that with the issue of guidelines by RBI, banks, and NBFCs would not be permitted to capitalize the penalty amount with the principal amount. The same shall have to be recovered from the borrower separately, and any additional penalty on the penalty amount shall have to be made clear to the borrower in a transparent way.

To reduce the number of loan defaulters, RBI issued several guidelines to lending institutions to make changes in their financial products and way of working as transparent, providing them with a comprehensive overview of borrower rights.

Earlier, RBI issued guidelines for NBFCs and banking institutions to restrict their funding to fintech players as such entities are difficult to be identified as entities under the FLDG agreement of RBI with banks. The FLDG agreement is a scheme run by RBI with NBFCs and banks to provide them some relief in case the borrower defaults on the loan.

In accordance with RBI clarification on FLDG agreements on fintech lenders, the Ministry of Electronics also banned more than 94 lending apps posing them to be a threat for data leaks and excess financial exploitation of borrowers.

In August 2022, RBI provided rules for lending by digital lending entities to borrowers where more disclosures for the charges, defaults, and recoveries were required to be stated to borrowers. In a recent notification, RBI directed entities to also disclose details of recovery agents who are going to contact the borrowers in case of default. This was proposed to reduce customer exploitation and to make the final lending entity accountable for lending other than LSP (Lending service provider) entities.

However, banks would be provided an option to change their recovery agent if a default happens. But details of the new recovery agency or agent are to be provided to the borrower through email/SMS before following the procedure of recovery.

RBI also issued directions for LSPs (Lending Service Providers) to charge their recovery fees from banks rather than charging them from the borrowers. It was placed on the duty of banks to disclose all penal charges charged on account of delay in payment or other non-compliance by borrowers through the Key Fact Statement of the loan under “The Contingent Charges” head.

All things considered, the above mercy directions undertaken by RBI aim to help borrowers and regulate entities create a borrower-friendly banking environment. The digital lending rules and penal charges aim to provide relief to borrowers who are facing difficulties in their loan repayment due to irrelevant compliances and charges placed on their accounts and have been considered as NPA.

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