What changed
RBI has explicitly prohibited charging interest from the date of loan sanction or agreement instead of actual disbursement. It also bars charging interest for the full month when disbursement or repayment occurs mid-month, and collecting advance instalments while charging interest on the full loan amount. Regulated entities must review and correct their practices immediately.
What it means for you
Banks and NBFCs must align their loan systems to compute interest strictly from the date funds are credited to the borrower, not from earlier dates. This will reduce customer complaints and potential refund liabilities, but may require system-level changes to loan origination and interest calculation modules. Lenders using cheques for disbursement must ensure interest starts only when the cheque is handed over or credited.
What you must do
- Audit all loan products to ensure interest is charged only from the actual disbursement date, not sanction or agreement date.
- For cheque disbursements, ensure interest accrual begins on the date the cheque is handed over to the customer, not the cheque date.
- Modify systems to calculate interest on a daily basis for mid-month disbursements and repayments, avoiding full-month charges.
- Stop collecting advance instalments while charging interest on the full loan amount; adjust loan amortization schedules accordingly.
- Encourage use of online account transfers for loan disbursement to eliminate cheque-related timing issues.
Who it affects
All Commercial Banks (including Small Finance Banks, Local Area Banks, RRBs), All Primary (Urban) Co-operative Banks, State Co-operative Banks, DCCBs, All NBFCs (including Microfinance Institutions and Housing Finance Companies)
Does this circular apply to loans disbursed before April 29, 2024?
The circular takes immediate effect from April 29, 2024. For existing loans, REs must review and correct any ongoing unfair practices, such as charging interest from sanction date, and refund excess interest collected.
What if our system currently charges interest from the date of loan agreement?
You must change your system to charge interest only from the actual disbursement date. This may require IT system modifications to loan origination and interest calculation modules.
Are there any exemptions for specific loan types like microfinance or housing loans?
No exemptions are mentioned. The circular applies to all regulated entities and all loan products, including microfinance and housing loans.