RBI’s latest notification comes as a relief for loan borrowers, who have been fleeced by lenders who unfairly levied interest charges.The RBI has asked such practices to be discontinued and a refund to be provided by banks and NBFCs for excess interest collected. One such unfair practice is the calculation of interest from the date of loan execution rather than actual disbursement.
What do RBI’s latest guidelines and instructions to banks and NBFCs mean for loan borrowers? We explain the math and answer your common questions:
What unfair practices have been highlighted by the RBI?
According to the RBI notification, following are some of the unfair practices that have been observed:
- Charging of interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer. Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later.
- In the case of disbursal or repayment of loans during the course of the month, some Regulated Entities were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
- In some cases, it was observed that Regulated Entities were collecting one or more installments in advance but reckoning the full loan amount for charging interest.
What action has RBI taken?
According to the RBI notification, these and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers. “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. REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal,” the central bank has said.
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What does RBI’s notification mean for consumers?
Adhil Shetty, the CEO of Bankbazaar.com told TOI, “The current RBI administration has been systematically pushing for greater transparency around loan charges. The latest notification is a step in the same direction. The central bank has called out what it has termed unfair practices by lenders, such as charging interest on loans from the date of sanction instead of the date of disbursal.”
“The notification highlights that loan disbursal through cheques is a way through which there can be a gap between sanction and disbursal, thus increasing the interest burden on customers. This notification is positive for customers who can expect to trim their interest outflows,” he said.
Atul Monga, CEO and Co-Founder, BASIC Home loan explains, “Charging interest from the date of loan sanction rather than from the date of actual disbursement can indeed impose additional financial burden on borrowers, particularly in the case of home loans where there might be a significant time gap between sanction and disbursement.”
Monga elaborates with an example:
Suppose a borrower has been sanctioned a home loan of Rs 50 lakhs at an interest rate of 8.5% per annum for a tenure of 30 years. However, due to various administrative processes, the actual disbursement of the loan takes three months from the date of sanction.
If the lender charges interest from the date of sanction, the borrower would be liable to pay interest on the entire sanctioned amount of Rs 50 lakhs for the three-month period, even though they haven’t received the funds yet.
Let’s do the math:
Loan amount: Rs 50,00,000Interest rate: 8.5% per annumTenure: 30 yearsInterest for 3 months = Rs 1,15,338.So, the borrower would end up paying Rs 1,15,338 as additional interest for the three-month period if interest is charged from the date of sanction, Monga tells TOI.
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He adds that it is imperative for lenders to adhere to fair lending practices norms and charge interest from the date of actual disbursement rather than from the date of loan sanction, to ensure transparency and fairness in lending practices, especially in scenarios like home loans where substantial amounts are involved.
Similarly, to recover interest on the full loan amount, even when some installments have been taken in advance, increases the loan burden on the borrower, and is an unfair practice since the borrower is overcharged since he pays interest on loan amount not received or utilized. To take an example, if a customer takes a loan for Rs 20,000 and repayment requires 12 EMIs, but the lender takes two advance installments of Rs 4,000. Even though an individual has received only Rs 16,000 in loan, he ends up paying interest on the entire Rs 20,000 loan amount.