RBI directs lenders to review their lending practices in line with fair practice code

The Reserve Bank of India (RBI) on Monday directed regulated entities to review their lending practices in line with fair practice code after it found that some lenders are resorting to certain unfair practices in charging interest rates, a statement issued by the regulator said.

The RBI said that during the onsite inspection for March 2023 of regulated entities, the RBI came across instances of unfair practice by some lenders regarding charging interest rates.

The regulator pointed out that some lenders charged interest on loans from the date of sanctioning or execution of the loan agreement rather than from the date of disbursement.

RBI also noted that there were cases where loans were disbursed by cheque, and lenders charged interest from the cheque date, whereas the cheque was handed over to the customer several days later.

RBI also directed regulated entities to disburse loans through online account transfers instead of issuing cheques.

The regulator said there are instances where the disbursement or repayment of loans has happened during the month. Yet, some REs charged interest rates for the entire month, rather than charging interest only for the period the loan was outstanding.

There are also cases where the regulated entities have collected one or more instalments in advance but reckoned the full loan amount for charging interest, the regulated stated.

The RBI said the guidelines on the Fair Practices Code issued in 2003 advocated fairness and transparency in charging interest by lenders while providing adequate freedom to lenders on the pricing of the loan.

The regulator stated that such non-standard practices of charging interest rates are not in the spirit of fairness while dealing with customers.

"These are matters of serious concern to the Reserve Bank. Wherever such practices have come to light, RBI, through its supervisory teams, has advised REs to refund such excess interest and other charges to customers," RBI stated.

"All REs are directed to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system-level changes," RBI added.