RBI asks all regulated entities to review their lending practices

The Reserve Bank of India (RBI) on Monday directed all regulated entities (REs) to review their lending methods, including the mode of disbursals and application of interest and other charges, to ensure fairness and transparency.

The regulator has also asked the entities to take corrective measures, including system-level changes.

The direction comes after RBI’s onsite examination of these entities showed several instances where lenders were resorting to unfair practices while charging interest. The examination was conducted during the period ended March 31, 2024.

Among unfair practices, the banking regulator observed that lenders are charging interest from the date of sanction of the loan or execution of the loan agreement instead of the date from when the funds are actually disbursed to the customers. Even in the case of loans disbursed through cheque, there were incidents where the interest was charged from the date mentioned on the cheque and not from the date the cheque was handed over to the customer, which used to be several days later.

Meanwhile, during the disbursal of loans or at the time of repayment during the course of the month, some REs were charging interest for the entire month, rather than the period for which the loan was outstanding.

RBI also noticed cases where these entities collected one or more instalments of payment in advance but calculated the full loan amount while charging interest.

The regulator in a release said, “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.”

Such matters were regarded as areas of serious concern to the RBI, with the regulator advising the REs to refund such excess interest and other charges to customers through its supervisory teams.

Furthermore, RBI said that the REs are also encouraged to use online account transfers instead of issuing cheques in certain cases for loan disbursal.