When you apply for a loan, your primary aim is to reduce the interest rate of the loan. And that’s a fair concern too. We assume that the interest (the cost of the loan) will be calculated properly. However, the Reserve Bank of India, the banking regulator, has found during examination that certain lenders have resorted to unfair interest calculation practices to the detriment of the borrowers.
What Are Some of the Unfair Practices That Lenders Have Followed?
- Charging interest from the date of loan sanction/date of agreement signing and not from the date of actual disbursement.
- Charging interest from the date of cheque issuance and not from the date when the cheque was handed over to the borrower
- In the case of disbursal of loans during a month, charging interest for the entire month rather than charging for the period during which the loan was outstanding. Similarly, in case of repayment during the month, charging interest for the month without adjusting for the repayment amount during the course of the month.
- Charging interest over the full loan amount despite collecting a few advance installments.
Points to Note
- RBI has noticed “instances of lenders resorting to certain unfair practices in charging of interest”.
- Not all banks are doing this. A few banks may be doing this for all or a certain category of loans.
- RBI has neither revealed the names of the banks nor shared the exact quantum of excess interest charged to the borrowers. Hence, we do not accurately know the extent of unfair earnings.
- The Reserve Bank has “advised” the banks/NBFCs/HFCs to refund the excess interest and other charges to the borrowers. Hence, if you have been at the receiving end of this unfair practice, then you can expect some refund from the borrower.
- The RBI has also encouraged lenders to use online account transfers instead of cheques to avoid such issues.
The circular takes immediate effect. i.e., effective from the date of the circular (April 29, 2004).
How Much Extra Interest Were You Charged?
The excess cost charged to the borrower will depend on the loan amount, the rate of interest, and number of days (for which the interest was unfairly charged).
For instance, if the bank has charged you extra interest for only 5 days on a Rs 50 lacs loan at 10% p.a., the excess cost incurred by the borrower is Rs 6,944. For a Rs 5 lac loan at 10% p.a., 5 days interest will be only Rs 694. Now, this amount may not be high relative to the loan amount. That may also be the reason why many borrowers may not fight with the lenders about such unfair costs.
Well, this may not seem like a big cost to an individual borrower. However, from the bank’s perspective, if you add this number up for lakhs and crores of borrowers, we are looking at a huge number. Clearly, the regulator didn’t like all this.
You must also note that some of these unjust costs have been imposed both at the time of disbursal and repayment. Hence, the quantum of such unjust earnings can be huge.
What Can You Do about Such Practices?
Be aware. Look at the loan statements.
Question calculation of various costs. Try to recreate those costs on paper or in a spreadsheet. If your calculations yield a lower number, ask your bank to explain their workings. With this, you will have a firmer grip on loan calculations.
It is also possible that the loan agreements allow banks to impose such unfair costs on the borrowers. Hence, even if you were to question the banks about charges, you would lose out to the legal fine print. However, now that the RBI has called this out as unfair, you have a much stronger case.
Checking your loan statements regularly can also help identify much bigger issues. For instance, you may find you are paying much higher than the prevailing interest rates in the market. And this is not uncommon, especially if your loans are on older interest rate regimes (PLR, Base Rate, and MCLR). If you are able to find such issues with your loan, the interest savings can be huge. Much higher than the amounts discussed in this post. For instance, if you can reduce the interest rate on your loan by 1% p.a. you can save about ~5 lacs over the loan tenure on a 50 lacs loan for 15 years.