Lenders must charge interest only from the date funds actually reach the borrower, must not bill a full month for a part-month, and must not charge interest on instalments collected in advance. (RBI/2024-25/30, dated April 29, 2024.) It applies to all commercial banks (incl. sfbs, labs, rrbs; excl. payments banks). Effective: Immediate effect.
This is a short, sharp conduct circular born from RBI's on-site inspections, and it touches money in every LAP account. During examinations for the year ended March 2023, RBI found lenders quietly inflating interest in three ways. This circular tells everyone to stop and refund.
First, some lenders charged interest from the date of sanction or the date the loan agreement was signed, rather than from the date the money actually reached the borrower. In disbursals by cheque, interest was sometimes charged from the date on the cheque even though the cheque was handed over days later. Interest may now run only from actual disbursement.
Second, when a loan was disbursed or repaid mid-month, some lenders charged a full month's interest instead of only for the days the loan was actually outstanding. Interest must track the real outstanding period.
Third, some lenders collected one or more instalments in advance but still calculated interest on the full loan amount — effectively charging interest on money the borrower had already repaid. That is not allowed.
RBI has called these practices a matter of serious concern, directed lenders to refund excess interest and charges where found, and encouraged online transfers instead of cheques to remove the disbursal-date gap. All regulated entities must review their disbursal mode, interest application and systems and make corrective, system-level changes. For a LAP desk, the action is auditing the loan-management system's interest-start logic and broken-period and advance-EMI handling — and refunding any excess already collected. The circular took immediate effect.
Only from the date the funds actually reach the borrower — not the sanction date, agreement date, or cheque date if the cheque is handed over later.
No. Interest must be charged only for the days the loan is actually outstanding in that month.
No. You cannot reckon the full loan amount for interest when instalments have been collected in advance.
Yes — where these practices are found, RBI has directed lenders to refund the excess interest and charges to customers.
Immediately, on 29 April 2024. RBI also encourages online account transfers instead of cheques for disbursal.