RBI reviews regulatory framework on recovery of penal charges on loans

08 Feb 2023


Reserve Bank of India (RBI) has reviewed the extant regulatory guidelines on levy of penal interest by regulated entities that give REs the operational autonomy to formulate board approved policy for levy of penal interest on advances, which shall be fair and transparent. 

The intent of penal interest was essentially to inculcate a sense of credit discipline among borrowers through negative incentives but such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest. RBI noted divergent practices amongst REs with regard to levy of penal interest which were excessive in certain cases, leading to customer grievances and disputes.
In this context RBI has decided that any penalty for delay/default in servicing of the loan or any other non-compliance of material terms and conditions of loan contract by the borrower shall be in the form of ‘penal charges’ in a reasonable and transparent manner and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest being charged on the advances, says a central bank release. 
Further, RBI stated, there shall be no capitalisation of penal charges (ie, the same shall be recovered separately and shall not be added to the principal outstanding). However, in case of any deterioration in credit risk profile of the borrower, REs shall be free to alter the credit risk premium under extant guidelines on interest rate. RBI said it would soon place on its we3bsite draft guidelines to the above effect, for comments from stakeholders.
The Reserve Bank said it recognises that climate change can translate into climate-related financial risks for Regulated Entities (REs) which can have broader financial stability implications. Therefore, to prepare a strategy based on global best practices on mitigating the adverse impacts of climate change, RBI has already placed a Discussion Paper on Climate Risk and Sustainable Finance its website, for public comments and feedback. Based on analysis of the feedback received in this regard, it has been decided to issue the following guidelines for REs:
  • Broad framework for acceptance of Green Deposits;
  • Disclosure framework on Climate-related Financial Risks; and
  • Guidance on Climate Scenario Analysis and Stress Testing.
RBI said the guidelines will be issued in a phased manner. Further, the RBI will have a dedicated webpage on its website which will consolidate all instructions, press releases, publications, speeches and related RBI communication on climate risk and sustainable finance.
Expanding Payment and Settlement Systems
RBI issued the guidelines on Trade Receivables Discounting System (TReDS) in December 2014 with the objective of facilitating the financing of trade receivables of MSMEs. Subsequently, three entities started operating TReDS platforms and two more entities have been granted in-principle authorisation. These entities process about Rs60,000 crore worth of transactions annually.
To provide further impetus to TReDS platforms, RBI has proposed to expand the scope of activity in a way that would help in further improving the cash flows of MSMEs.
Insurance facility will now be permitted on TReDS. This will encourage financing/discounting of payables of buyers irrespective of their credit ratings. Accordingly, insurance companies will be permitted to participate as a “fourth participant” on TReDS, apart from the MSME sellers, buyers and financiers.
All entities / institutions eligible to undertake factoring business under the Factoring Regulation Act will be permitted to participate as financiers in TReDS.
Secondary market operations will now be enabled on TReDS platforms. This would allow financiers to offload their existing portfolio to other financiers within the same TReDS platform, if required.
Extending UPI for inbound travellers
Unified Payments Interface (UPI) has become a ubiquitous payment instrument for retail electronic payments in India. An enhancement has recently been made to provide UPI access to non-resident Indians who have international mobile numbers linked to their NRE / NRO accounts. It is now proposed to permit all inbound travellers to India also to access UPI for their merchant payments (P2M) while they are in the country. To start with, this facility will be extended to travellers from the G-20 countries, arriving at select international airports. Going forward, this facility will be enabled across all other entry points in the country. RBI said it would issue necessary operational instructions shortly.
Currency management
To improve distribution of coins among members of the public, RBI said it is preparing a pilot project on QR Code based Coin Vending Machine (QCVM) in collaboration with a few leading banks. The QCVM is a cashless coin dispensation machine which would dispense coins against a debit to the customer’s bank account using Unified Payments Interface (UPI).
Unlike cash-based traditional Coin Vending Machine, the QCVM would eliminate the need for physical tendering of banknotes and their authentication. Customers will also have the option to withdraw coins in required quantity and denominations in QCVMs.
The pilot project is planned to be initially rolled out at 19 locations in 12 cities across the country. These vending machines are intended to be installed at public places such as railway stations, shopping malls, marketplaces to enhance ease and accessibility. Based on the learnings from the pilot tests, guidelines would be issued to banks to promote better distribution of coins using QCVMs.

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