New Delhi:  The Reserve Bank of India (RBI) has instructed regulated lending entities to review and rectify certain practices regarding the charging of interest rates that have been deemed unfair to borrowers.

This directive comes after the central bank’s inspections in March 2023 revealed instances where some lenders resorted to non-standard and opaque methods when applying interest charges.

In a statement released on Monday, the RBI outlined several problematic practices identified during the inspections. These include lenders charging interest from the date of loan sanction or agreement execution rather than disbursement, as well as levying interest charges on loans disbursed via cheque from the issue date rather than when the physical check was received by the borrower days later.

The regulator also noted cases where despite only a portion of the month seeing the loan outstanding, certain lenders charged interest for the full month. Additionally, there were instances of lenders collecting installments in advance but still calculating interest on the full original loan amount.

While the 2003 Fair Practices Code guidelines allow pricing freedom for lenders, the RBI stated that the revealed practices violate the spirit of fairness and transparency expected when dealing with customers.

“These are matters of serious concern,” the statement read, adding that where such practices have come to light, lenders have been advised to refund any excess interest or charges to impacted borrowers.

All regulated entities have now been directed to review their loan disbursement methods, interest rate application, and other fee calculations.

The RBI has mandated they implement corrective actions, including system-level changes if required, to ensure future compliance with fair lending practices.