To ensure fair lending, the Reserve Bank of India (RBI)

Solution

To ensure fair lending, the Reserve Bank of India (RBI) has prohibited lenders from compounding penal interest arising from loan defaults with future repayments.   Also, the penalty imposed by regulated entities (REs) on customers for default and breaching loan conditions are to be treated as penal charges are debarred from imposing such charges as penal interest, which is added to the rate of interest.   These instructions will come into effect from January 1, 2024.    These instructions will, however, not apply to credit cards, external commercial borrowing, trade credits and structured obligations covered under product-specific directions.      The penal charges for loans sanctioned to individual borrowers, for purposes other than business will not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance with material terms and conditions.