Penal Charges on Loans: What Borrowers Should Ask in Writing
A lender may levy disclosed penal charges for material non-compliance, but the charge should not become a hidden interest-rate enhancer.
The right question is not merely “was I late?” but “which contractual breach, amount base and disclosed charge produced this figure?”
What the rule means in practice
RBI’s fair-lending framework requires penalties for non-compliance with material loan terms to be treated as penal charges rather than penal interest added to the interest rate. The quantum and reason must be disclosed transparently in the loan agreement, Key Fact Statement where applicable, and the lender’s policy.
Penal charges must not be capitalised, meaning the lender should not calculate further interest on those charges. Normal interest can continue on the outstanding principal under the loan contract. For repayment default, RBI’s FAQ clarifies that the penal charge should be based on the amount under default rather than automatically on the entire outstanding balance.
Not every amount labelled as a “charge” is the same. Cheque-bounce fees, mandate-failure fees, legal expenses, overdue interest and penal charges can have different bases. Ask for a line-by-line ledger instead of arguing from the total figure.
Decision table
| Ledger item | What to check | Borrower question |
|---|---|---|
| Contractual interest | Rate and principal base | Does it match the sanction and reset communication? |
| Penal charge | Material breach and amount base | Which clause and default amount were used? |
| Bounce or mandate fee | Per-instance disclosure | How many failed presentations occurred? |
| Legal or recovery expense | Actual basis and contract | Is supporting documentation available? |
| Tax | Applicable tax treatment | Was tax applied only where legally due? |
A borrower misses one EMI of â‚ą25,000 on a much larger outstanding loan. The lender should be able to explain the penal-charge policy and the default amount used. The borrower should not assume the charge must be zero, but can challenge an unexplained calculation on the entire loan balance.
Action checklist
- Obtain the loan agreement, KFS and lender’s schedule of charges.
- Request the complete loan ledger in a readable format.
- Identify each default date and amount under default.
- Check whether penal charges were added to principal for further interest.
- Pay undisputed contractual dues while recording the disputed component.
- Send a concise written complaint with your calculation and requested remedy.
Evidence checklist
- Sanction letter and KFS
- Loan agreement and charge schedule
- Account ledger with value dates
- EMI payment and mandate records
- Default or covenant notice
- Written grievance and lender response
Common mistakes
- Calling every overdue amount “illegal penalty”
- Ignoring normal contracted interest
- Disputing by phone without a written trail
- Stopping all payments during a charge dispute
- Confusing bounce fees with penal charges
Red flags
- Charge description absent from the ledger
- Interest calculated on accumulated penal charges
- Charge not disclosed in agreement or KFS
- Entire outstanding used despite a small payment default without explanation
- Retrospective change without notice
Escalation route
Ask the lender’s grievance officer for the contractual provision, policy and calculation. If an RBI-regulated entity does not resolve an eligible complaint through its internal process, consider RBI CMS. Court or arbitration advice may be required for contractual disputes outside the Ombudsman’s scope.