The Reserve Bank of India (RBI) has directed lenders on Monday to review practices such as disbursal of loans and application of interest that could be considered unfair.

The directive has come in the wake of the RBI finding instances of malpractices regarding duration for calculating interest and quantum of repayment instalments, among others.

Concerned over some banks and lenders resorting to these unfair practices, the RBI has asked lenders to take corrective action "including system level changes".

"During the course of the onsite examination of regulated entities (REs) of some banks and lenders resorting to unfair practices for the period ended March 31, 2023, the Reserve Bank came across instances of lenders resorting to certain unfair practices in charging of interest," the RBI said in a circular. 

The central bank has also highlighted certain unfair practices being followed by certain lenders.

"...In the interest of fairness and transparency, all REs are directed to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system level changes, as may be necessary, to address the issues concerning charging of interest,” the circular said.

During onsite examinations of REs, the RBI said it observed charging of interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of funds to the customer.

It also came across instances where interest was charged from the date of the cheque whereas it was handed over to the customer several days later.

In the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than only for the period for which the loan was outstanding, the RBI said.

In some cases, it was observed that REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.

The RBI further said unfair practices and other such non-standard practices of charging interest are not in resonance with the spirit of fairness and transparency while dealing with customers.

"These are matters of serious concern to the Reserve Bank. Wherever such practices have come to light, RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers," the circular said.

REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal, it added. 

The circular takes effect immediately.