RBI’s historic decision, exemption to millions of borrowers, arbitrary penalty recovery stopped

News India Live, Digital Desk: Banking Regulations: It often happens that we take a loan from the bank, but sometimes due to financial crisis or any emergency, there is a delay of one or two days in paying EMI (monthly installment). In such a situation, banks and non-banking financial companies (NBFCs) used to impose heavy penalty (fine), which caused a lot of problems for customers. But now the Reserve Bank of India (RBI) has given a huge and relief news for crores of such borrowers! Now even if your EMI misses, the banks will not be able to recover ‘penalty interest’ arbitrarily. This is a historical step protecting lenders from harassment!

What is this ‘relief’ decree of RBI?
RBI has given clear instructions to banks and NBFCs that they from January 1, 2024 on personal loan, home loan, education loan, car loan or any other retail and MSME loan ‘Penal Interest’ Can not apply Earlier it used to be that when EMI was late, your outstanding amount was imposed on your arrears, which was very high. Now this arbitrary recovery will stop!

What will change in the new rules? Headlines:

1. ‘Reasonable Penal Charges):

   • In lieu of punitive interest, now bank ‘Penal Charges’ Will be able to apply

   • What is the difference? This penalty fee will not be charged as additional interest on the entire amount of loan or outstanding amount. This will be a fixed or reasonable fee, which will be associated with your original installment.

   • This means that the penalty will now be imposed only on your untouched installment or that default, not as interest on the entire loan amount.

2. There will be transparency in loan agreement:

   • Under the new rules, while giving a loan, the bank or NBFC will have to clearly tell in its loan agreement how much ‘penalty fee’ will be incurred on missing EMI.

   • This information will not be seen as the total interest rate of the loan, but will be written in a separate item (separate section). With this, the customer will know everything while taking a loan.

   • No compounding effect: Now the penalty will not be fined ie compounding penalty.

3. Emphasis on systematic recovery, ban on harassment:

   • The aim of RBI is to teach the bank customers financial discipline, not harass them or put additional burden on them.

   • The aim of the new rules is to prevent excessive punitive fees on bank customers and bring fairyness in the debt recovery process.

Who will get the most benefit from this?

• Middle class borrowers: Millions of middle class families, who sometimes missed EMI due to small fluctuations in their income, would benefit the most. Now they will not have to pay heavy fine interest.

• Small traders (msmes): It is also a major relief for small and medium industries (MSMES), as they often faced fine due to delay in working capital loan.

What is the effect on bank and NBFCs?
Banks and NBFCs have to change their policy. Now they will be able to conduct the recovery process in a more appropriate and transparent manner. Their profits may be slightly less, but this will increase the confidence of the customers, and the country’s financial stability will also be strong.

Penal Charges: Late in paying EMI will no longer pay heavy fine, RBI gives great relief