What changed
Previously, Rule 10(g) of URRBCH required penal interest at clean overdraft rate plus 2% for unauthorised overdrafts from the next working day. Now, RBI has partially modified this to allow interest on intra-day overdrafts as well, with rates linked to the LAF Repo Rate: Repo + 100 bps for intra-day and Repo + 300 bps for overnight or longer. The spread compensates for the non-collateralised nature of these overdrafts.
What it means for you
Banks extending clearing overdrafts now have a transparent, uniform pricing benchmark, reducing disputes over exorbitant rates. Member banks face higher costs for overnight overdrafts, especially during holidays, increasing credit risk management focus. Settlement banks must refund charges if member banks prove funds were credited in time to the settlement bank's account at Mumbai or other central location.
What you must do
- Update your clearing overdraft interest rate policies to align with LAF Repo Rate plus 100 bps for intra-day and 300 bps for overnight.
- Ensure transparent discussion of interest rates with member banks before extending overdrafts.
- Implement a process to verify and refund overdraft charges if member banks provide proof of timely fund credit to your settlement account.
- Review your risk management for holiday periods when overdrafts may extend longer without adequate compensation.
Who it affects
All Scheduled Commercial Banks including RRBs, Urban Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks
What is the new interest rate for intra-day clearing overdrafts?
Intra-day overdrafts (same day) must be charged at the RBI LAF Repo Rate plus 100 basis points, regardless of the number of hours the funds are used.
What happens if an overdraft extends beyond the same day?
If the overdraft continues overnight or longer, the interest rate becomes the LAF Repo Rate plus 300 basis points, reflecting the higher credit risk due to non-collateralisation.
Can a member bank get a refund of overdraft charges?
Yes, if the member bank can prove that funds were remitted and credited to the settlement bank's account at Mumbai or another central location in time, but the settlement account was not credited promptly, the overdraft charges must be refunded.