What are the RBI rules on penal charges?
What a lender may and may not charge.
Short answer. A penal charge must be reasonable, levied only on the amount in default, and fixed by a Board approved policy. It cannot be capitalised, so no further interest runs on it, and it must be the same for every borrower of that product.
The rule, lender by lender
| Kind of lender | What the rule says |
|---|---|
| Finance company | Penal charges must be reasonable and charged only on the amount in default. Read the rule |
| All India financial institution | Penal charges must be reasonable and charged only on the amount in default. Read the rule |
What else the rule says
- Penal charges cannot be capitalised. No further interest may run on them. · source
- Within a loan product, penal charges must be the same whoever the borrower is. · source
- The Board must approve a policy on penal charges by whatever name they are called. · source
- A reminder about a breach must state the penal charge that applies. · source
- Existing loans move to the new penal charge rules at the next review or renewal. · source
- The penalty for late repayment must be printed in bold in the loan agreement. · source
- A delayed payment charge applies to the overdue amount, not the whole loan. · source
- A change in interest rate or charges can only apply from that date onwards. · source
- A fresh penal charge cannot be added on top of penal charges already due. · source
- Interest on unpaid interest runs at the contracted rate, not the penal rate. · source
Where this comes from
- Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Directions, 2025 (Updated as on July 1, 2026)
- Reserve Bank of India (All India Financial Institutions – Responsible Business Conduct) Directions, 2025 (Updated as on July 1, 2026)
Other questions answered here
- How much capital must an Indian lender hold?
- How often must KYC papers be updated?
- How much can a bank lend against gold?
- How much can a lender invest in an alternative investment fund?
- Can a bank sell insurance in India?
- Every question BankPulse answers
- Every rule page on BankPulse
Plain-language summary, not the official text. Not legal advice. Every line above is a point published on the rule page it links to. · Report a mistake