Penal Charges on Loans: What the RBI's Rules Say
Penal interest and a penal charge are different things
Penal interest is a higher interest rate charged as punishment: a few points added on top of the contracted rate when a borrower defaults. A penal charge is an amount, stated in advance, levied for the default and shown on its own. The RBI's circular of 18 August 2023 said many lenders were adding penal rates on top of the contracted rate, that penalties are meant to instil credit discipline and are not meant to be a revenue enhancement tool, and that its reviews had found varying practices that led to customer complaints.
The rule that followed, now in the RBI's 2025 directions for commercial banks and for NBFCs (which housing finance companies also follow), says a penalty for not meeting a loan's material terms is to be a penal charge, not penal interest. A late or missed repayment counts as such non-compliance. The lender is not to add any component to the rate of interest. The charge is to be reasonable and commensurate with the default, not discriminatory within a loan or product category, and levied only on the amount in default. On a loan to an individual for a non-business purpose, it is not to be higher than the charge on non-individual borrowers for a similar default. The directions set no rupee or percentage cap.
The rule applies to fresh loans taken from 1 April 2024. Existing loans were to switch on their next review or renewal date, and not later than 30 June 2024. It does not cover credit cards, external commercial borrowings, trade credits or structured obligations covered by product-specific directions.
What "capitalised" means
A charge is capitalised when it is added to the balance on which interest runs. Take an EMI of Rs 20,000 that stays unpaid for a month on a loan at 12% a year, with a penal charge of Rs 500. If the Rs 500 were capitalised, the next month's interest would also run on it: Rs 500 x 12% / 12 = Rs 5. The rule says penal charges are not to be capitalised, so no interest is to be computed on the Rs 500, and no fresh penal charge is to be levied on penal charges already outstanding. What the rule still allows is interest at the contract rate on the unpaid EMI itself: Rs 20,000 x 12% / 12 = Rs 200 for the month.
Where the stated penalty is written down
The amount and the reason for a penal charge are to be disclosed upfront in three places: the loan agreement, the Key Facts Statement, and the lender's website under "Interest rates and Service Charges". A line in the agreement that only points to the website is not enough. Each reminder for a default is to state the penal charge that applies, and when a charge is levied, the lender is to communicate it and the reason. Those documents give the rate or amount this checker asks for.
On GST, CBIC Circular No. 245/02/2025-GST of 28 January 2025 says no GST is payable on penal charges levied by RBI-regulated lenders in compliance with the RBI's directions.
Raising it with the lender, then the RBI
A complaint goes to the lender first, in writing, with the statement and the page of the agreement or Key Facts Statement that states the penalty. If the lender does not reply within 30 days, or the reply does not resolve the complaint, it can go to the RBI Ombudsman under the Reserve Bank – Integrated Ombudsman Scheme, 2026, within 90 days of the date the 30 days ran out or of the lender's last reply, whichever is later. Complaints are filed online at cms.rbi.org.in or by e-mail to crpc@rbi.org.in. The RBI describes the scheme as cost-free: there is no fee to file. The scheme covers banks and certain NBFCs.
Every rule on this page, with the paragraph it comes from and the day it was checked, is in the sheet under the calculator. Readers whose statements show charges like these can also send them to Oquilia's investigations desk.