Explained: How banks might have been overcharging you on your loan

The Reserve Bank of India (RBI) is cracking down on banks that are charging customers extra fees. The central bank wants to ensure that banks are lending money responsibly and following proper procedures. This helps to protect both borrowers  and the banks themselves.

The problem: The RBI found some banks charging customers interest on loans before the money was even given to them. 

RBI has asked banks and other lenders (called "regulated entities" in this case) to review how they give out loans. This includes how they disburse the money (like through cheque or account transfer) and how they charge interest and other fees. The RBI wants to make sure everything is clear and upfront for borrowers. This means you should understand exactly how much you're borrowing, when you'll get the money, and how much interest and fees you'll be charged. The RBI has also asked banks to take corrective actions if they find any issues with their lending practices. This could involve changing their systems or procedures to make things fairer for borrowers.

Examples of unfair practices:
 

Interest charged too early: Some banks were charging interest from the day they approved your loan or when you signed the agreement, instead of waiting until they actually gave you the money. This means you were potentially paying interest on funds you hadn't even received yet.

Cheque delays, interest keeps running: If your loan was disbursed via cheque, some banks might have started charging interest from the date on the cheque, even if it took days for them to actually hand you the check. So, you were essentially losing money while waiting to access your loan.

Full month interest for partial months: In some cases, banks charged interest for the entire month, even if you received the loan or made a repayment partway through the month. This means you were overpaying on interest for days you didn't technically have the loan.

Advance payments, full loan interest: If you made some loan payments in advance, some banks might have still calculated interest based on the full loan amount, not the remaining balance. This means you weren't getting the benefit of your early payments.

The RBI has now asked banks to stop these unfair practices and to return any extra money they charged customers. The direction comes after RBI’s onsite examination of these entities showed several instances where lenders were resorting to unfair practices while charging interest. The examination was conducted during the period ended March 31, 2024.

The regulator in a release said, “These and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers.”

The RBI also encouraged banks to use faster methods like online transfers instead of checks for loan disbursal.

The circular takes immediate effect, the central bank added.