Borrower security and system transparency being most pertinent, the Reserve Bank of India (RBI) has issued directions to bring about changes in the penal interest applicable on EMI defaults charged by banks or by non-banking finance companies. Since June 15, 2025, banks cannot impose penal interest for any late payment of loan installments. Although they are free to impose penal charges, these have to fall within the prescribed limits.
What Has Been changed?
Earlier, all penalties would trigger interest arising the late payment with additional penal interest for the delay on top of the rate agreed upon for the loan. This case submitted a lot of confusion and scenarios on the practice implemented by the banks.
According to the RBI directive, banks are not allowed now to charge penal interest on any outstanding loan amount. Instead, they will have to impose a penal fee for the same, clearly mentioning this charge in the loan agreement so that unwary borrowers do not get unfairly burdened with wild penalty costs.
What Does This Mean For The Borrower?
The loan borrowers, home loans, personal loans, auto loans, and business loans, should consider this decision being the relief to great length as entails:
- According to the copy of the previous law, penal interest was paid on penal interest, the sums often becoming inordinate to be repaid.
- Penal charges should be conspicuously mentioned in the charging clause so that a borrower knows what will be charged in case of delay.
- Uniform guidelines would apply for all the banks and all non-banking financial companies in the lending process, ensuring uniformity and fairness of the system.
Applicability And Enforcement
This new rule shall apply to all fresh loans sanctioned after the 15th of June, 2025. For existing loans, it shall be applicable when such loans are reviewed or renewed. The RBI has given instruction to all the financial institutions to review their internal policies and to notify customers well in time. Any institution guilty of flouting or violating this Rule shall attract action by the regulators.
Conclusion
With the new EMI rule, the RBI has made a borrower-friendly reform for fairness and reducing the weight of arbitrary penalties. From June 15, 2025, borrowers shall read loan agreements with care and shall have exact knowledge of the penal charges that will be applicable when there is a delay.
Also Read:New Govt Pension Scheme: Senior Citizens To Get RS 20,000 Monthly