RBI forbids banks from charging penal interest

The Reserve Bank of India released guidelines on Friday to control the penalties that banks and other lenders may impose borrowers for late payments or other violations.

The central bank stated in its circular that it has provided the Regulated Entities (REs) with a number of instructions to guarantee fairness and openness in the declaration of penal interest.

However, it has been noted that many REs employ penal interest rates in addition to the appropriate interest rates when borrowers fail to comply with the conditions under which credit facilities were approved.

According to the RBI, any fine imposed on the borrower for failing to comply with important terms and conditions of the loan agreement will be treated as "penal charges" and won't be added to the rate of interest charged on the advances as "penal interest."