Module: | KYC, NPAs, Advances & Investment Valuations
Q199: Consider the following statements regarding the reset of floating interest rates and the levy of penal charges:
1. Upon the reset of floating interest rates, banks must ensure that the elongation of the loan tenor does not result in negative amortisation.
2. Penalties for non-compliance of material terms must be levied strictly as 'penal interest' with mandatory capitalisation over the loan tenor.
3. Penal charges levied on individual borrowers for non-business purposes cannot be higher than the penal charges applicable to non-individual borrowers for similar non-compliance.
4. For floating rate loans sanctioned on or after January 1, 2026, banks are strictly prohibited from levying pre-payment charges on loans granted to Micro and Small Enterprises (MSEs) for business purposes.
Which of the statements given above is/are correct?
2. Penalties for non-compliance of material terms must be levied strictly as 'penal interest' with mandatory capitalisation over the loan tenor.
3. Penal charges levied on individual borrowers for non-business purposes cannot be higher than the penal charges applicable to non-individual borrowers for similar non-compliance.
4. For floating rate loans sanctioned on or after January 1, 2026, banks are strictly prohibited from levying pre-payment charges on loans granted to Micro and Small Enterprises (MSEs) for business purposes.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The regulations safeguard borrowers by mandating that tenor elongation during a floating rate reset must never lead to negative amortisation.
Statement 2 is incorrect: The guidelines strictly ban the levy of 'penal interest' and its capitalisation, mandating that penalties must be treated solely as flat 'penal charges' without further interest compounding.
Statement 3 is correct: The framework establishes parity, ensuring individual retail borrowers are not penalized heavier than corporate or non-individual entities for similar non-compliance.
Statement 4 is correct: The updated directives introduce a major amendment banning pre-payment charges for all floating rate loans given to individuals (for non-business purposes) AND Micro and Small Enterprises (for business purposes) sanctioned from January 1, 2026, onwards.
Statement 2 is incorrect: The guidelines strictly ban the levy of 'penal interest' and its capitalisation, mandating that penalties must be treated solely as flat 'penal charges' without further interest compounding.
Statement 3 is correct: The framework establishes parity, ensuring individual retail borrowers are not penalized heavier than corporate or non-individual entities for similar non-compliance.
Statement 4 is correct: The updated directives introduce a major amendment banning pre-payment charges for all floating rate loans given to individuals (for non-business purposes) AND Micro and Small Enterprises (for business purposes) sanctioned from January 1, 2026, onwards.