The RBI pulled up banks for overcharging borrowers in the guise of penal interest rates and has devised proposals to protect borrowers from unjustified rates. In a draft circular on levying penal charges on loan accounts, the regulator said the penalty should be levied as a charge, not as a compounding interest rate.
The banking regulator noted that while it gave banks operational autonomy to charge penalties to borrowers, it had come to light that this was being used as a revenue enhancement tool. It has been observed that many regulated entities use penal rates of interest over and above the applicable interest rates, it said in the draft circular.
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