The Reserve Bank of India (RBI) on Monday directed banks to review their practices regarding disbursal of loans, application of interest and other charges after it observed some of them resorting to unfair measures.

In a circular, the banking regulator, which has taken stern action against certain lenders in recent times, also directed them to refund excess charges to customers and take corrective action including system-level changes as may be necessary.

The RBI reminded commercial banks, non-banking finance companies, and urban co-operative banks that the guidelines on the Fair Practices Code, issued in 2003, advocate fairness and transparency in charging of interest. This comes even as it provides them adequate freedom on the pricing of loans.

The central bank said that during the onsite examination of regulated entities (REs) for the period ended March 31, 2023, it came across instances of lenders resorting to certain unfair practices in the charging of interest.

Highlighting the unfair practices being followed by certain lenders, the RBI said it observed them charging interest from the date of sanction of a loan or date of execution of loan agreement instead of the date of actual disbursement of funds to the customer.

Further, it came across instances where interest was charged from the date of the cheque whereas it was handed over to the customer several days later.

The RBI further pointed out that in the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, instead of the period for which the loan was outstanding.

In some cases, it was observed that REs were collecting one or more instalments in advance but were considering the full loan amount for charging interest.

“...in the interest of fairness and transparency, all REs are directed 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, to address,” the issues concerning the charging of interest, the circular which takes immediate effect said.

The RBI added that unfair practices and other such non-standard practices of charging interest do not align with the spirit of fairness and transparency while dealing with customers.

“These are matters of serious concern to the Reserve Bank. Wherever such practices have come to light, RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers,” it noted. REs are also being encouraged to use online account transfers instead of cheques being issued in a few cases for loan disbursals.

Recently, the RBI has said that all lenders will have to provide key facts statement (KFS) about the loan agreement terms, including all-inclusive interest cost to borrowers for retail and MSME loans, from October 1.