In a latest update, the Reserve Bank of India(RBI) has warned lenders to not levy interest from the date of loan sanction, instead of actual disbursement on Monday April, 29.
Lenders Can’t Levy Interest On Loan Amounts Not Received
They appear to have found in their observations that there is often a lag between sanction and disbursement dates In a home loan or other loans.
But, while charging, they start charging it from the date of sanction. This in turn imposes an additional interest cost on the borrower.
It seems that banks charging interest from the date of loan sanction or loan agreement execution rather than from the date of actual disbursement, is a violation of fair lending practices norms.
In this case, the borrower ends up paying interest on money that they haven’t received, this also inflates the cost of borrowing.
In a second observation, in the case of loans disbursed by cheque, charging interest from the date of the cheque rather than when it’s cashed or deposited can lead to customers being charged for funds they haven’t accessed.
With this practice, these customers end up paying more than they should for borrowing money and eroding trust in the lending institution.
Borrower Paying More Interest Than They Should
Further, RBI said that they had come across instances where banks or NBFCs were levying interest for the entire month despite the loan being disbursed or repaid within the month.
In this case, again the customers end up paying more interest than they should.
This happens as customers are being charged for days when the loan has already been repaid.
Here it is notable that the lander were collecting advance installments while still charging interest on the full loan amount.
In this case, recovering interest on full loan amounts, even in cases where the installment was paid in advance, results in overcharging.
It appears that the customers are paying interest on loan amounts they have not received or utilized yet.
This can simply be understood by this example where a customer takes out a loan of Rs10,000 and the repayment schedule requires monthly installments over a period of 12 months.
Here, the lender collects two installments in advance, totalling Rs2,000, at the time of loan disbursement.
In this case, the lender calculates interest charges based on the full Rs 10,000 loan amount, despite only receiving Rs 8,000.
The 2003 guidelines on the Fair Practices Code advocate fairness and transparency in charging interest rates, according to RBI.
However, these do not prescribe any standard practice with the objective of providing adequate freedom to lenders regarding their loan pricing policy.
According to RBI, non-standard practices of charging interest “are not in consonance with the spirit of fairness and transparency” in its letter.
