No longer current — withdrawn, no replacement on file yet
Source: Reserve Bank of India · RBI/2010-11/474 · issued 11 Apr 2011 · ~1 min read
Quick answerRBI found RRBs wrongly compounding interest on agri loans quarterly/half-yearly instead of per crop cycle. Sponsor banks must fix software to align with rules, and RRBs must refund excess interest charged.
What changed
A joint NABARD-RBI study revealed that some RRBs compound interest on agricultural loans at quarterly or half-yearly intervals, ignoring the cropping or harvesting cycle. This violates existing RBI instructions. The circular directs sponsor banks and RRBs to correct software and manually re-credit excess interest.
What it means for you
RRBs must immediately review their loan accounting systems to ensure interest compounding matches the crop cycle, not arbitrary calendar periods. Non-compliance could lead to customer grievances and regulatory action. Sponsor banks are on the hook to fix software flaws that fail to separate principal from interest before compounding.
Historical instruction — do not use for current compliance. This is what was required at the time; it no longer reflects current RBI requirements. If no replacement rule is linked above, that only means none is recorded on our register yet — it does not prove no later applicable rule exists. Confirm on the official RBI source below.
What banks were required to do at the time
Audit your agri loan portfolio to identify accounts where interest was compounded outside the cropping/harvesting cycle.
Coordinate with your sponsor bank to modify or replace loan software to segregate principal and interest correctly.
Re-credit excess interest charged to affected borrowers and report the action to your RBI Regional Office and NABARD.
Train staff on manual accounting to prevent human errors in interest calculation.
Who it affects
All Regional Rural Banks (RRBs), Sponsor banks of RRBs, Agricultural loan borrowers of RRBs
❓ Common questions
Regulatory timeline
Decoded by BankPulse2026-06-19 01:55 IST
repealed_by — Consolidation of Regulations — Withdrawal of circulars (28 Nov 2025)
Status change: withdrawn03 Aug 2026, 04:00 IST
Built from our lineage records — each fact carries its provenance; missing history simply is not shown (never guessed).
Why is compounding interest quarterly a problem for agri loans?
Agricultural income follows crop cycles, not fixed calendar quarters. Compounding quarterly can overcharge farmers who repay only after harvest, violating RBI's priority sector lending guidelines.
What should RRBs do if their software cannot separate principal and interest?
RRBs must work with their sponsor bank to upgrade or replace the software. In the interim, manual corrections and re-crediting of excess interest are required.
Do RRBs need to report corrective actions to anyone?
Yes, RRBs must advise their respective RBI Regional Office and NABARD after re-crediting excess interest.
📜 This document’s life story (1 recorded event, each backed by RBI’s own words)
Repealed byRBI/2025-26/100 — Consolidation of Regulations — Withdrawal of circulars (28 Nov 2025)
RBI’s words: “Official withdrawal register entry #1536: RPCD.CO.RRB.BC.No.59/03.05.72/2010-11 — "Compounding of Interest on Agriculture Loans" dated April 11, 2011”
📜 Read the original circular — full text as issued by RBI
RBI/2010-11/474
RPCD.CO.RRB.BC No. 59/03.05.72/2010-11
April 11, 2011
The Chairman
All Regional Rural Banks
The Chairman & Managing Director
All Sponsor Banks
Dear Sir,
Compounding of interest on Agriculture Loans
Please refer to the instructions contained at para. 5. in RBI Master circular RPCD. CO. Plan. BC. No. 10/04.09.01/2010-11 dated July 1, 2010 on Lending to Priority Sector, addressed to Scheduled Commercial Banks, together with the instructions contained in para. 2 of RPCD circular RRB. BC. No. 96/ 03.05.34/ 2001-02 dated May 27, 2002, read with para. 2 of the circular RRB. BC. No. 105/ 03.05.34/ 2001-02 dated June 11, 2002 addressed to the RRBs, on the captioned subject.
2. A recent study undertaken by Regional Offices of NABARD and RBI in select States has revealed that compounding of interest on quarterly/ half-yearly basis, and not as per cropping/ harvesting cycle/s on agricultural loans, was prevalent in some RRBs. In certain cases, NABARD has also observed that RRBs have been using the software package developed by their sponsor banks, which has no provision for segregating interest from principal before applying the interest for the next period. Wherever manual accounting was involved, the compounding was observed in a few cases attributed to human error.
3. It is, therefore, imperative that sponsor banks/ RRBs develop/ modify the software package to ensure that the process of compounding of interest on agricultural loans falls in line with the extant instructions on the subject issued to them. Also, RRBs should re-examine the relevant cases and arrange to re-credit the excess interest wrongly charged in the accounts, under advice to our respective Regional Offices and to NABARD.
Yours faithfully,
(C.D.Srinivasan)
Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2010-11/474 · issued 11 Apr 2011. The plain-English explanation above is BankPulse’s own independent summary.
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 03 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6338&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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