Penal Charges vs Penal Interest: RBI Loan Rules - citizen guide 2026

Since 1 January 2024, your bank or NBFC can charge only a flat penal charge when you miss a loan instalment, not “penal interest” stacked on top of your loan rate. This change came from the RBI circular “Fair Lending Practice - Penal Charges in Loan Accounts” dated 18 August 2023. If your statement still shows extra interest on a default, you can ask for a correction and a refund.

Short on time? Jump to the step-by-step below to spot illegal penal interest on your statement and claim a refund.

The RBI told all banks and NBFCs to stop calling default penalties “penal interest” and switch to a flat “penal charge”. A penal charge is a fixed amount you pay once for a breach, such as a missed EMI. It does not compound, and no interest can be charged on it. The aim is fair, transparent default pricing, not lender revenue.

The rule comes from the RBI circular “Fair Lending Practice - Penal Charges in Loan Accounts”, dated 18 August 2023 (ref DoR.MCS.REC.28/01.01.001/2023-24). It took effect from 1 January 2024 (extended to 1 April 2024 for some lenders). RBI issued it under its statutory powers over banks and NBFCs.

The circular sets four hard limits:

• Penalty for default of a material loan term must be a penal charge (a flat charge), not “penal interest” added to the loan rate.
• No capitalisation: the lender cannot charge any further interest on the penal charge.
• Penal charges must be reasonable and tied to the breach, not used as a revenue tool.
• An individual borrower taking a loan for non-business purposes cannot be charged a higher penal rate than a corporate borrower for the same default.

RTI relevance: a public-sector bank is a “public authority” under RTI Act 2005, §2(h), and so is the RBI. You can file an RTI to the bank's Public Information Officer (PIO) for its board-approved penal-charge policy and the exact computation on your account. The Banking Ombudsman and the RBI Complaint Management System (CMS) are a separate escalation, not RTI.

1. Pull your loan statement and the latest interest certificate from net banking or the branch.
2. Look for any line that adds a higher interest rate after a missed payment, or that charges interest on a penalty amount. That is the old “penal interest” pattern and is no longer allowed.
3. Compare it against your sanction letter and the Key Fact Statement, which should list a flat penal charge instead.
4. Write to the bank asking it to reverse any penal interest charged on or after 1 January 2024 and to apply only the flat penal charge.
5. If the bank does not reply or refuses, file an RTI to the public-sector bank's PIO for the penal-charge policy and your account computation. Use the AI RTI draft tool to draft it.
6. Still unresolved? Escalate to the RBI Ombudsman through the RBI CMS portal at cms.rbi.org.in. This is a grievance route, not an RTI.

• Loan account statement showing the disputed charges
• Sanction letter and Key Fact Statement
• Interest certificate for the financial year
• Copy of your written request to the bank and its reply, if any
• Your loan account number and registered mobile or email

• Treating a penal charge as illegal. A flat penal charge for a real default is allowed; only “penal interest” on the rate is barred.
• Filing the refund claim as an RTI. RTI gets you the policy and computation; the refund itself is a grievance for the bank or RBI Ombudsman.
• Missing the start date. The bar on penal interest applies from 1 January 2024, so older entries follow the earlier rules.
• Forgetting the equal-treatment point. As an individual non-business borrower, your penal rate cannot exceed a company's for the same default.

A public-sector bank must answer an RTI from its PIO within 30 days under RTI Act 2005, §7(1). Ask for two things: the board-approved penal-charge policy effective from 1 January 2024, and the line-by-line computation of every penal entry on your account. The reply gives you documentary proof if you later approach the RBI Ombudsman.

Sample lines for your RTI application:

1. Provide a certified copy of the bank's board-approved penal-charge policy in force from 1 January 2024, framed under the RBI circular dated 18 August 2023.
2. Provide the date-wise computation of all penal charges and any penal interest debited to my loan account number since 1 January 2024.
3. State whether any interest was charged on a penal charge in my account, and if so, the amount and the basis.

If the PIO does not reply in 30 days or gives an evasive answer, file a first appeal within 30 days using the first appeal tool.

A penal charge is a flat, one-time fee for breaking a loan term, such as a late EMI. Penal interest was an extra interest rate added to your loan rate after a default. Since 1 January 2024, RBI allows only the flat penal charge, not penal interest. The penal charge does not compound, and no interest can be charged on it.

The RBI circular “Fair Lending Practice - Penal Charges in Loan Accounts” is dated 18 August 2023. It took effect from 1 January 2024, with the date extended to 1 April 2024 for some lenders. Entries dated before this followed the older penal-interest practice.

No. The circular bars capitalisation. The lender cannot charge any further interest on the penal charge. If your statement shows interest building on a penalty amount dated on or after 1 January 2024, that is not allowed and you can ask for a reversal.

Yes, you can ask for it. Write to your bank to reverse any penal interest charged on or after 1 January 2024 and to apply only the flat penal charge. If the bank refuses, escalate to the RBI Ombudsman through the CMS portal. RTI gets you the policy and computation, but the refund itself is a grievance, not an RTI outcome.

Yes. The circular says an individual borrower whose loan is not for business cannot be charged a higher penal rate than a corporate borrower for the same default. If a company would pay less for an identical breach, you can challenge the difference.

Yes, if it is a public-sector bank. It is a public authority under RTI Act 2005, §2(h), and its PIO must reply within 30 days under §7(1). Ask for the board-approved penal-charge policy and the computation on your account. For private banks and NBFCs, use the grievance route and the RBI Ombudsman instead.

Yes. A reasonable flat penal charge for a genuine default is allowed under the circular. What is barred is penal interest added to your loan rate and any interest charged on the penalty. Check your Key Fact Statement, which should disclose the flat penal charge.

• RBI circular “Fair Lending Practice - Penal Charges in Loan Accounts”, dated 18 August 2023, ref DoR.MCS.REC.28/01.01.001/2023-24 - https://www.rbi.org.in
• RBI Complaint Management System (Ombudsman) - https://cms.rbi.org.in
• Right to Information Act 2005 - https://www.indiacode.nic.in

• Draft an RTI to your bank PIO
• File a first appeal if the PIO ignores you
• Raise your RTI grievance with Awaaz RTI
• The RTI Playbook