FAQs on ‘Fair Lending Practice – Penal Charges in Loan Accounts’

Here is a summary of the provided document:

Summary

The document discusses the guidelines for penal charges on loans and credit facilities as specified in Circulars DoR.MCS.REC.28/01.01.001/2023-24 and DoR.MCS.REC.61/01.01.001/2023-24. The guidelines aim to ensure that penal charges are reasonable, commensurate with the non-compliance of material terms and conditions of the loan contract, and uniformly applied across borrowers within a particular loan/product category.

Key points:

Existing loans: Switchover to new penal charges regime is to be ensured on next review or renewal date or six months from the effective date of the circular, whichever is earlier.
Trade credit and structured obligations are excluded from the applicability of the circular.
Material terms and conditions of a loan contract may vary from one category of loan to another and from lender to lender.
Penal charges can be levied for default in repayment, but not for interest, and must be reasonable and non-discriminatory.
Interest charged for the period of default (including unpaid EMI) is to be treated as regular or overdue interest, not penal interest.
The structure of penal charges must be uniform within a particular loan/product category, regardless of borrower constitution.
Additional penal charges cannot be levied on earlier outstanding amounts.
Cash Credit and Overdraft facilities are exempt from penal charges guidelines and subject to penal interest.
A board-approved policy is required for levying penal charges, and quantum must be reasonable and commensurate with non-compliance.
GST is applicable on penal charges, payable at the time of accrual or actual realization.
* In case of invocation of Bank Guarantee or Letter of Credit, penal charges may be imposed, but with an appropriate rate of interest on the devolved amount.

I hope this summary is helpful! Let me know if you have any further questions.