Concept Definition: The RBI distinction between Penal Interest (which is banned) and Penal Charges (which are allowed). The Rule: 1. Non-Capitalization: You cannot add the penalty to the principal loan amount and then charge interest on it (No "interest on tax" or compounding of penalties). 2. Transparency: It must be a fixed amount, reasonable, and commensurate with the default, rather than a revenue generation tool.

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Reasoning: The RBI observed that banks were using "Penal Interest" (e.g., adding 2% over the normal rate) to compound debt, making it impossible for stressed borrowers to recover.

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The new rule enforces fairness.