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Context

• The Reserve Bank of India (RBI) has implemented new guidelines on penal charges and penal interest on loan accounts, effective from April 1.
• These rules aim to prohibit banks and finance companies from imposing extra charges on borrowers for missing loan payments or violating other loan terms.

Key Features of the New RBI Rules

Ban on Penal Interest:

• • The RBI prohibits banks from charging penal interest, traditionally imposed on customers for late EMI payments.

Restriction on Additional Charges:

• • Banks cannot add extra charges to the interest rate. However, they are still permitted to levy penalties, which should not be included in the loan amount or accrue additional interest.

Purpose of Penal Charges:

• • Penal charges are meant to promote responsible credit behavior, rather than solely increasing revenue. However, the RBI's review revealed misuse of these charges by banks and finance companies.

Penal Charges vs. Penal Interest

Penal Charges:

• • Fixed fees imposed separately from the interest rate.

Penal Interest:

• • Additional rate added to the customer's existing interest rate.
• The RBI instructs banks not to include penal charges in the loan amount and not to calculate additional interest on these charges.

Implementation Timeline

• The new guidelines apply to all new loans from April 1, with existing loans subject to the norms from June 1, 2024.
• The implementation date was postponed from January 1 to April 1 to allow financial institutions more time to adjust.

Determining Penal Charges

• Banks will apply charges based on the defaulted amount, following their board-approved policy.
• While charges should be reasonable, the RBI has not specified a maximum limit for these charges.

Applicability to Other Loan Products

• The updated guidelines cover various loan portfolios but exclude certain categories like export credit and foreign currency loans.
• For non-performing loan accounts, banks are instructed to reverse any uncollected accrued income.

PRACTICE QUESTION Q. What is SCORES 2.0 recently launched by SEBI? Explain its significance in the securities market and highlight its key features aimed at enhancing investor complaint redressal.