Answer Book question
No. Since April 2024 the RBI has barred banks and NBFCs from punishing a missed payment with a higher interest rate. They may charge a one-time, disclosed 'penal charge' on the overdue amount only, and they may not add that charge to your loan and charge interest on it. If your statement shows 'penal interest', you have grounds to complain.
No. Since April 2024 the RBI has barred banks and NBFCs from punishing a missed payment with a higher interest rate. They may charge a one-time, disclosed 'penal charge' on the overdue amount only, and they may not add that charge to your loan and charge interest on it. If your statement shows 'penal interest', you have grounds to complain.
Biju in Pandalam misses two EMIs on a ₹6 lakh vehicle loan during a slow quarter. His next statement shows his rate moved from 10.5% to 12.5% 'due to default'. Under the old practice this was routine. Under the 2024 rule it is not allowed: the bank may levy a fixed penal charge on the two overdue instalments, disclosed in his loan agreement, and nothing more.
The RBI's 'Fair Lending Practice – Penal Charges in Loan Accounts' direction (issued August 2023, in force for new loans from 1 April 2024 and for existing loans by 30 June 2024) draws a line between interest and penalty. Interest is the price of the loan. A penalty is a charge for breaking a term. The bank may no longer dress the penalty up as extra interest, may not compound it, and must state the amount and the reason in the loan agreement and the Key Fact Statement.
The charge must be 'reasonable', levied only on the overdue amount, and the penal charge for an individual's personal loan cannot be higher than what the bank charges a company for the same default.
Your loan agreement or Key Fact Statement: is the penal charge stated as a fixed amount or percentage of the overdue sum? Your statement after a missed EMI: is the extra amount shown as a separate 'penal charge', or has your interest rate itself changed? Whether the penal charge was added to principal (you can tell because next month's interest is slightly higher than it should be) GST: penal charges attract GST; penal interest never did. A GST line is a clue the bank has moved to the new regime Credit cards are outside this rule; they follow the RBI card directions instead
Assuming the bank is right because the number is small. A 2% rate hike on a twenty-year home loan is worth lakhs. Also: the rule applies to existing loans too, not only loans taken after April 2024.
Gold loans and vehicle loans from NBFCs headquartered in Kerala are covered exactly like bank loans. NRI borrowers servicing a Kerala home loan from the Gulf often miss an EMI because of a transfer delay; the penalty should be a fixed charge on that one instalment, not a permanent rate change.
₹8,000 EMI missed by 20 days. Old practice: 2% extra on the full ₹5 lakh outstanding, every month until 'regularised'. roughly ₹833 a month, for as long as the bank chose. New rule: a disclosed penal charge, say 2% a year on ₹8,000 for 20 days, which is about ₹9, plus GST. If the bank's charge is a flat ₹500, that is the charge; it still cannot touch your rate.
If your rate rose because the repo rate or the bank's benchmark moved, that is a floating-rate reset, not a penalty, and a different chapter applies (Loans 4). If you are more than 90 days overdue and the account is an NPA, recovery rules apply on top, but the no-penal-interest rule still holds.
Write to the branch quoting the RBI Fair Lending Practice direction of 18 August 2023 and ask for the penal charge schedule in writing Ask for a recomputation if the rate was changed as a penalty No reply in 30 days: file at cms.rbi.org.in (see Complaints 1)
My EMI went up because rates rose. What are my options? The bank ignored my complaint. Who is above the bank?
Loans & bank disputes
RBI circular 'Fair Lending Practice – Penal Charges in Loan Accounts', 18 August 2023, with the 29 December 2023 extension and 15 January 2024 FAQs · Your loan agreement and Key Fact Statement · Your bank's published schedule of penal charges Last checked: 22 August 2026. Rates, limits and whether you may qualify change. Confirm with the official source before you act. Ask Kerala Rising: Use only general, non-identifying facts.
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