The Reserve Bank of India (“RBI”) had implemented the Fair Practices Code for lenders in 2003 (“FPC”), to protect borrowers from unfair lending practices and to ensure that banks/ financial institutions adhere to ethical lending practices. The FPC guidelines being issued to various Regulated Entities (“REs”) since 2003 advocate fairness and transparency in charging interest by the lenders, while providing adequate freedom to REs for their loan pricing policy. 

RBI Circular dated April 29, 2024 – Fair Practices Code for Lenders – Charging of Interest

This circular was issued by RBI on April 29, 2024 (“Circular”) to several REs as listed in the Circular itself, in relation to the FPC, and is effective immediately.

The Circular directs all REs to review their practices regarding modes of disbursal of loan, applications of interest and other charges and take corrective actions, including system level changes as necessary, because RBI, based on the onsite examinations of REs for the period ended March 31, 2023, came across certain instances of malpractices by REs like:

1. Charging of interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer; and from the date of the cheque (in cases of loans being disbursed by cheque) even though the cheque was handed over to the customer several days later. 
2. In the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
3. Collecting one or more loan instalments in advance but still reckoning the entire loan amount for charging interest.

The RBI said that such non-standard practices of charging interest from customers are matters of serious concern and hence advised REs to refund the excess interest and other charges to customers. The RBI also encouraged REs to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal. Further, the RBI directed all REs to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system level changes, as may be necessary.

What are REs? 

REs generally refer to banks and other financial institutions which are subject to the regulatory jurisdiction of RBI. The RBI website provides a list of the REs falling under its jurisdiction which includes banks, authorized dealers in foreign exchange, NBFCs, etc.

This update has been contributed by Armaan Patkar (Partner) and Ayushi Khetan (Associate).

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