Penal interest on term loans by state bank of india

As per Master Circular of RBI no.: 

RBI/2013-14/73
DBOD.No.Dir.BC.  15 /13.03.00/2013-14 dated July 1; 2013

Extract on Penal Interest: 

" 

2.5 Levying of Penal Rates of Interest

Banks are permitted to formulate a transparent policy for charging penal interest with the approval of their Board of Directors. However, in the case of loans to borrowers under priority sector, no penal interest should be charged for loans up to ` 25,000. Penal interest can be levied for reasons such as default in repayment, non-submission of financial statements, etc. However, the policy on penal interest should be governed by well-accepted principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customers."

As per SBI Portal:

PENAL INTEREST & OTHER CHARGES

Penal Interest will not be charged for loans up to Rs 25000. For Loans above Rs.25000/- , if the irregularity exceeds EMI or Installment amount, for a period of one month ,then penal interest would be charged @ 2% p.a.(over and above the applicable interest rate) on the overdue amount for the period of default. If part installment or part EMI remains overdue, then penal interest should not be levied. Other Charges (if any) will be as per actual.

So, as per above two notifications, the penal interest is to be charged only on OVERDUE amount.

For more clarity, check the terms and conditions of loan agreement with bank, signed by you for availing the loan.

Many thanks for the reply.

As per SBI Service Charges Circular "REVISED SERVICE CHARGES APPLICABLE W.E.F. 01/06/2015"  - Point No; 19 (vii)

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Point 19 Application of Penal Interest

(vii) Term Loan

(a) Non-payment of Interest / Instalment : 

" In addition to 1 % p.a. penal interest on entire outstandings for period of default, flat penalty ( penal interest) of Rs 1000/- for each day of delay beyond due date of payment."

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This circular is being referred by bank and trying to charge penal interest on the "ENTIRE OUTSTANDING OF TERM LOAN" for the period of default.
 

Yes Sir, no other option than. Even in your agreement there would be a clause, that Bank reserves right to change the rates of interest and penalty from time to time!!!!

Many Thanks for your reply.  Still, the issue is, we found another circular, that penal interest cannot be charged on CDR Account, if the same decided in JLF Meeting. We will try this route. There are many circulars of SBI, certain circulars favours bank, and certain circulars favours borrowers. We will try our best, to select those circulars of SBI, in our favour, and proceed further.

All the best!!!!