Loan Compounding Penalty: Customers will benefit from this date, now banks will not be able to charge arbitrary charges on default.

Customers taking loans from banks or NBFCs are going to get a great gift in the New Year. The Reserve Bank has put a stop to the arbitrary charges levied by banks and financial institutions in case of default in loan installments. Earlier this change was going to happen from the first day of the new year. Now the customers will have to wait a little longer for this relief.

The arbitrariness of the banks will stop.

Actually, in case of loan, banks and NBFCs default in paying the installments to the customers. Many cases of charging arbitrary fees and interest etc. were coming to light. In view of these matters, the regulator Reserve Bank intervened and prepared a way to curb arbitrariness. Now the Central Bank has completely clarified the situation regarding the charges to be levied in case of default, which is going to be a big benefit to the customers.

The change was going to happen from January itself.

Earlier this change was going to be implemented from the beginning of the new year i.e. from the first of January 2024. Now customers will have to wait for a few days for this. The Reserve Bank has informed about extending the deadline for this. Now banks and NBFCs have been asked to implement the new system for new loans from April 1. In the case of old loans, they have been asked to implement the new system before June 30, 2024 under all circumstances. The Reserve Bank had first clarified the situation by issuing a circular in August 2023 regarding the charge. In that the Central Bank had told how banks and NBFCs etc. can collect the levy. The Reserve Bank says that the purpose behind charging penal interest or penal charges in case of default in payment of loan installments was to create discipline among people regarding credit.

Interest will not have to be paid as penalty.

Now the Reserve Bank has made it clear that banks charging penal interest in case of default will have to be closed. Now the levy will only be called penal charges. This means that in case of default, there will be no penalty in the form of interest. This will benefit the customers as the penal penalty will not be compounded due to the penalty being charged as interest, i.e. compounding on the penalty will not have to be paid. This will stop the arbitrariness of banks, which in many cases used to charge punitive interest many times more than the basic interest of the loan.

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