Although no upper limit/ cap for penal charges has been prescribed in the circular, the REs, while formulating their Board approved policy on penal charges, should keep in mind that the intent of levying penal charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool. Accordingly, the quantum of penal charges shall have to be ‘reasonable’ and ‘commensurate’ with the non-compliance of material terms and conditions of loan contract.

Since instructions related to GST are issued by Central Board of Indirect Taxes & Customs (CBIC), instructions and clarifications, if any, issued by CBIC in this regard may be followed.

In case of the funded facility created on account of invocation of BG/ devolvement of LC, the bank may charge an appropriate rate of interest on the devolved amount taking into account the associated credit risk premium as per the bank’s credit underwriting policy. However, penalty, if any, on that funded facility on account of non-repayment by the borrower within the due date may only be levied in the form of penal charges and not penal interest.

Banks may be guided by para 3.2.3 of the Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated April 1, 2023, as per which in respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected. Accordingly, in respect of NPA accounts, penal charges shall be reversed to the extent it remains uncollected for the specific purpose of non-recognition of income. However, the same shall be part of the total liability of the borrower to the lender, unless it is waived as per the bank’s Board approved policy.

In terms of Annexure II Part A (Notes and Instructions for compilation) for Schedule 13: Interest Income of Reserve Bank of India (Financial Statements – Presentation and Disclosure) Directions, 2021, Schedule 13 will include all types of interest / discount income for the banks. Accordingly, banks will disclose fees and charges, including penal charges, recovered from customers in ‘Schedule 14: Other Income’.

Yes. The prescribed instructions on penal charges are also applicable in case of securitisation and co-lending portfolios.

No. The prescribed instructions on penal charges are not applicable in case of rupee/ foreign currency export credit and other foreign currency loans.