FAQs on Penal Charges in Loan Accounts

Brief Overview:

FAQ in relation to the Fair Practice – Penal Charges in Loan Accounts guidelines dated 12th August 2023 (as amended) (the “Guidelines”) has been issued to clarify queries of stakeholders.

Technical Details:

Some of the key clarifications included in the FAQ are as follows:

1) Penalty for default in repayment shall only be levied in the form of penal charges and not penal interest.

2) REs may charge interest on unpaid interest (including on unpaid EMI) at the contracted rate of interest till the date of remediation, and not at the penal rate of interest.

3) Penal charges can be different within the same product category depending on non-compliance of material terms and conditions of the loan contract.

4) Additional penal charges cannot be levied on the earlier outstanding amount of penal charges.

5) Cash Credit (CC) and Overdraft (OD) facilities are not exempted from penal charges guidelines.

6) No upper limit / cap for penal charges has been prescribed, however the same to be ‘reasonable’ and ‘commensurate’ with the non-compliance of material terms and conditions of the loan.

7) Applicability of GST shall be as issued by Central Board of Indirect Taxes & Customs (CBIC), instructions and clarifications, if any.

8) In case of invocation of Bank Guarantee (BG) / devolvement of Letter of Credit (LC), the bank may charge an appropriate rate of interest on the devolved amount as per associated credit risk premium and credit underwriting policy.

9) In respect of NPA accounts, penal charges shall be reversed as per Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 1st April 2023, as amended from time to time.

10) The Guidelines shall be applicable to securitization and co-lending portfolios.

11) The Guidelines shall not be applicable to rupee / foreign currency export credit and other foreign currency loans.

JC Takeaways:

The Guidelines gain essential clarity through the FAQ. Nevertheless, the FAQ leaves room for additional elucidation, as the literal interpretation implies that regulated entities may charge interest on unpaid interest, and not at the penal rate of interest.

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