Loan Penal Charges by Bank or NBFC: Refund Complaint Route
Many borrowers see extra debits after a missed EMI, delayed document, insurance dispute, stock statement delay, or breach of loan terms. Some charges are valid. Some are poorly disclosed. Some are wrongly loaded into the loan balance.
Quick answer. RBI says penalty for non-compliance with material terms and conditions of a loan contract must be treated as penal charges, not penal interest added to the interest rate. RBI also says there shall be no capitalisation of penal charges, meaning no further interest should be computed on those charges. The amount and reason must be disclosed in the loan agreement and Key Facts Statement, where applicable. Ask for the clause, calculation, reason, date, and reversal. If the lender does not fix it, escalate to its nodal officer and then RBI CMS. RBI penal charges direction, RBI timeline extension
If you are short on time, go to what to do in the next 30 minutes.
What changed under RBI's penal charges rule
RBI issued fair lending instructions on penal charges in loan accounts on 18 August 2023. The instructions apply to commercial banks, co-operative banks, NBFCs including housing finance companies, and all India financial institutions listed in the circular. RBI penal charges direction
RBI later extended implementation. Fresh loans availed from 1 April 2024 had to follow the instructions. Existing loans had to switch on the next review or renewal date falling on or after 1 April 2024, but not later than 30 June 2024. RBI timeline extension
Penal charge is not the same as normal interest
Normal interest is the agreed interest on the loan. A penal charge is a penalty for non-compliance with material loan terms.
RBI says such penalty must be treated as penal charges and must not be levied as penal interest added to the rate of interest charged on the advances. RBI also says there shall be no capitalisation of penal charges. RBI penal charges direction
This is important because capitalisation can make a charge grow through further interest.
Step 1. Identify the charge
Do not assume every debit is a penal charge. Create a table.
| Debit shown by lender | It may be |
|---|---|
| Late payment charge | penal charge or EMI delay charge |
| Bounce charge | payment return charge |
| Penal interest | may need correction under RBI rule |
| Overdue interest | normal loan interest on overdue amount |
| Field visit charge | service or collection charge |
| Legal charge | recovery expense |
Ask the lender to label each debit and provide the clause.
Step 2. Ask for the loan agreement and KFS
RBI says the quantum and reason for penal charges must be clearly disclosed in the loan agreement and the most important terms and conditions or Key Facts Statement, as applicable. RBI also says these charges must be displayed on the regulated entity's website under interest rates and service charges. RBI penal charges direction
Ask for:
- signed loan agreement
- Key Facts Statement
- schedule of charges
- account statement
- charge-wise calculation
- reminder or notice that mentioned the applicable penal charge
RBI says whenever reminders for non-compliance are sent to borrowers, the applicable penal charges must be communicated. Any instance of levy of penal charges and the reason must also be communicated. RBI penal charges direction
Step 3. Check whether the charge is reasonable
RBI says the quantum of penal charges must be reasonable and commensurate with the non-compliance of material terms and conditions, and must not be discriminatory within a particular loan or product category. RBI penal charges direction
Ask:
- what material term was breached
- when it was breached
- what document proves the breach
- what rate or flat amount applies
- whether the same charge applies to similar borrowers in that product
Step 4. Object if it was charged as penal interest
Use this format:
Subject: Request for reversal or correction of penal charges in loan account Loan account number: [number] Borrower name: [name] Charge date and amount: [details] Please provide the loan clause, KFS disclosure, calculation, and reason for the penal charge. The debit appears to have been levied as penal interest / capitalised into the loan balance. RBI's fair lending instructions require penalty for non-compliance to be treated as penal charges, not penal interest added to the rate of interest. RBI also states that penal charges shall not be capitalised. Please reverse excess debit and issue a corrected statement.
Attach the statement and screenshot of the charge.
Step 5. Escalate to lender's grievance officer
If branch or app support gives only a standard reply, escalate to the lender's grievance officer or principal nodal officer.
Ask for:
- written decision
- corrected statement
- refund or adjustment
- confirmation that no interest was computed on penal charges
Keep the complaint narrow. A narrow complaint is easier to prove.
Step 6. File RBI CMS if unresolved
If the lender is regulated by RBI and the complaint is unresolved or unanswered after 30 days, use RBI CMS. RBI's Ombudsman FAQ says RB-IOS covers cost-free redress for deficiency in service by RBI regulated entities when unresolved to the customer's satisfaction or not replied to within 30 days. RBI Integrated Ombudsman FAQ, RBI CMS
Upload:
- first complaint
- lender reply
- loan agreement or KFS
- account statement
- charge calculation
- RBI rule link
- clear relief request
What relief to ask for
Ask for specific relief:
- reversal of wrongly levied penal charge
- refund of excess charge
- correction of loan statement
- reversal of interest computed on penal charges
- written reason for each debit
- correction of credit bureau reporting if the charge caused wrong overdue reporting
Read Wrong CIBIL entry after loan closure if credit reporting is affected.
FAQ
Are penal charges completely banned?
No. RBI allows penalties for non-compliance with material loan terms, but they must be treated as penal charges, not penal interest added to the interest rate, and they must not be capitalised. RBI penal charges direction
Can the lender decide its own penal charge policy?
RBI says regulated entities must formulate a Board-approved policy on penal charges or similar charges on loans, by whatever name called. RBI penal charges direction
Does the rule apply to individual borrowers?
Yes, and RBI adds that penal charges for loans to individual borrowers for purposes other than business must not be higher than charges applicable to non-individual borrowers for similar non-compliance. RBI penal charges direction
Does this apply to credit cards?
RBI's penal charges direction says the instructions do not apply to credit cards, external commercial borrowings, trade credits, and structured obligations covered under product-specific directions. RBI penal charges direction
What if the lender calls it overdue interest, not penal charge?
Ask for the clause and calculation. If the debit is really a penalty for breach of a material loan term, RBI's penal charges framework is relevant. If it is normal interest under the loan contract, the complaint must target calculation or disclosure instead.
What to do in the next 30 minutes
- Download the loan statement.
- Mark every extra charge.
- Ask for the loan agreement, KFS, schedule of charges, and calculation.
- Send a written reversal request.
- Ask whether any interest was computed on penal charges.
- Escalate to RBI CMS if the lender does not resolve it after the bank or NBFC complaint route.
Related
Sources
Last reviewed on 18 May 2026.
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