Expert View | RBI's latest notification on fair lending practices: How it affects the customer 

The Reserve Bank of India (RBI) on Monday issued a directive for regulated entities to review their lending practices after instances of unfair practices were discovered during inspections.

Some lenders were charging interest rates unfairly, including charging interest from the date of loan sanction rather than disbursement, and charging interest from the cheque date rather than when it was handed to the customer.

To ensure fairness and transparency in lending practices, the RBI directed entities to disburse loans through online transfers instead of cheques. It also advised entities to refund excess interest and make corrective actions, including system-level changes.

The RBI's latest notification on fair practices on interest charges is brilliant for consumers. Let's look at the key takeaways which will help you if you're looking for a new loan.

Interest Charge Timing

Some banks charge interest from the date of the loan approval or agreement rather than the loan sanction. This means if there's a delay between when you sign for a loan and when you actually receive the money, you shouldn't be paying interest for that waiting period.

Interest Calculation on Disbursed Funds

Where loans are disbursed via cheque, some banks charge interest from the date the cheque is issued, not when the cheque is cashed. This can unfairly increase the amount of interest you pay if there’s a delay in accessing the funds from the cheque.

Proportional Interest Charges

The RBI observed that some lenders charge interest for an entire month even if the loan wasn’t outstanding for the whole month. Ideally, interest should only be calculated for the number of days the loan amount is held during the month.

Advance Instalment & Interest Calculation

In some cases, consumers have been required to pay one or more EMIs in advance. Yet the interest was still calculated on the full loan amount as though these payments hadn’t been made. This practice can lead to paying more interest than necessary.

The RBI has taken these issues seriously, advising lenders where these practices were found to refund the excess interest and fees charged. Moreover, the RBI is pushing lenders towards more transparent practices, including the recommendation of using online transfers over cheques to speed up and clarify the disbursement process.