Missed an EMI? What RBI's Penal Charges Rules Mean for Bengaluru Home Loan Borrowers
RBI's August 2023 circular on penal charges says penalties for breaching loan terms must be levied as penal charges, not penal interest, must not be capitalised, and must be disclosed in the loan agreement and Key Fact Statement. Here is what that means for a Bengaluru borrower who misses an EMI.
A rate reset, a delayed salary credit, a bounced auto debit: missing a home loan EMI can happen for ordinary reasons, and a recent change in the instalment amount is one more reason to check your debit account. What happens next on your loan statement is governed by a specific set of Reserve Bank of India rules on penal charges, and they are worth knowing before you need them.
The RBI's circular on Fair Lending Practice, Penal Charges in Loan Accounts, dated August 18, 2023, applies to commercial banks other than payments banks, cooperative banks, NBFCs including housing finance companies, and all India financial institutions. With the repo rate raised to 5.50% on October 7, 2026, and resets working through floating rate loans, this is a good moment for Bengaluru borrowers to check how their own lender applies it.
The short answer. RBI's circular says penalties for breaching material loan terms must be levied as penal charges, not as penal interest added to your loan rate; there shall be no capitalisation of penal charges, meaning no further interest is computed on them; charges must be reasonable and commensurate with the non-compliance; individuals borrowing for non business purposes cannot be charged more than non individual borrowers for similar breaches; and the amount and reason must be disclosed in the loan agreement, the Key Fact Statement and the lender's website. The trade-off: knowing the rules helps you challenge a wrong levy, but the cheapest penalty is the one you avoid by keeping a buffer in the EMI account.
What did the RBI change about penalties on loans?
It separated penalties from the interest rate. The circular says penalty, if charged, for non compliance with material terms and conditions of the loan contract shall be treated as penal charges and shall not be levied in the form of penal interest that is added to the rate of interest charged on the advances. It also says lenders shall not introduce any additional component to the rate of interest, and shall ensure compliance with these guidelines in both letter and spirit.
The circular explains the intent plainly: penal charges are essentially meant to inculcate a sense of credit discipline, and are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest.
Can my bank charge interest on top of the penalty?
Not on the penal charges themselves. The circular says there shall be no capitalisation of penal charges, that is, no further interest computed on such charges. It also clarifies that this does not affect the normal procedure for compounding of interest in the loan account.
In practice, that means two things should be visible separately on your statement after a missed EMI: any penal charge, shown as a charge, and the regular interest the loan accrues under its normal terms. If the penalty appears as an increase in your interest rate, or if interest appears to be calculated on the penalty amount, ask the lender to explain the entry in writing.
How much can a lender charge as a penalty?
The circular does not set a rupee figure. Instead, it requires each lender to formulate a board approved policy on penal charges, and says the quantum shall be reasonable and commensurate with the non compliance of material terms and conditions, without being discriminatory within a particular loan or product category.
It adds a specific protection for home buyers who borrow as individuals. Penal charges on loans sanctioned to individual borrowers for purposes other than business shall not be higher than the penal charges applicable to non individual borrowers for similar non compliance. The actual amounts for your loan should be in your loan agreement and Key Fact Statement, which is why reading the charges section at sanction matters. Our explainer on reading the Key Fact Statement and its fees shows where to look.
What must the lender tell me before and after levying a penalty?
The circular sets three disclosure points. First, the quantum and reason for penal charges shall be clearly disclosed in the loan agreement and in the Key Fact Statement, as applicable, in addition to being displayed on the lender's website under interest rates and service charges. Second, whenever reminders for non compliance of material terms are sent, the applicable penal charges shall be communicated. Third, any instance of levy of penal charges and the reason for it shall also be communicated.
These requirements also mean the penal charges for your loan should be findable before anything goes wrong. When you compare lenders at the sanction stage, put the penal charges line from each Key Fact Statement side by side with the processing fee and the interest rate, since a lower headline rate does not tell you how a lender treats a late payment. That gives you a simple test. If a penalty appears on your statement without a prior reminder that mentioned it, or without a communication explaining the reason, you have grounds to ask the lender which part of its policy was applied.
| Question | What the RBI circular says | What to check on your loan |
|---|---|---|
| Can the penalty raise my interest rate? | No penal interest added to the rate of interest | The rate on your statement stays at the contracted rate |
| Is interest charged on the penalty? | No capitalisation of penal charges | No interest computed on the penalty amount |
| How much can be charged? | Reasonable and commensurate, per a board approved policy | The amount in your loan agreement and KFS |
| Individuals versus companies? | Not higher than for non individual borrowers | Compare with the lender's published charges |
| Will I be told? | Disclosed upfront; communicated in reminders and when levied | Keep reminders and levy notices with your loan file |
Which loans does this cover, and which does it not?
The circular applies to the lenders listed earlier, which includes commercial banks and housing finance companies. It excludes loans covered by product specific directions, naming credit cards, external commercial borrowings, trade credits and structured obligations. For existing loans, it set out a transition to the new regime at the next review or renewal date or within a fixed period, whichever was earlier.
If your home loan is with a lender in one of the covered categories, the rules above are the baseline for how penalties should appear. If you are unsure which category your lender falls into, the sanction letter and the lender's website should show whether it is a bank or a housing finance company.
How do I avoid penalties after a rate reset?
Start with the basics. After any reset, confirm the new EMI amount and the date it takes effect, and make sure the account your auto debit draws from holds a buffer above that amount. Our guide to home loan charges beyond the interest rate lists the other fees that can appear on a statement.
Timing helps too. If your salary is credited late in the month and your EMI date falls early, ask whether the lender can move the debit date, and check whether any charge applies to the change. If you can see a shortfall coming, for example during a job change, contact the lender before the due date rather than after. A written request made in advance is easier to discuss than a bounced debit, and it creates a record you can refer to later if a penalty is levied.
Finally, keep every reminder and levy notice the lender sends. Because the circular requires the applicable penal charges to be communicated in reminders and any levy to be communicated with its reason, those messages are the evidence you will need if you later dispute an entry.
If you are buying an under construction flat, remember there are two payment streams that can attract penalties: your lender's EMI or pre EMI, and the builder's stage demands, where Section 19(7) of the RERA Act makes the allottee liable for interest at the prescribed rate on delayed payments. Our piece on missing a builder instalment under RERA covers that side. A PropNewz project profile, such as our page on Brigade Exotica in KR Puram, can help you follow a project's progress, but the demand letters and your bank statements are what decide your payment calendar.
What should I do if a penalty appears on my statement?
Work through these steps before paying or disputing it.
- Find the penal charges section in your loan agreement and Key Fact Statement and note the stated amount and reason.
- Check whether you received a reminder that mentioned the applicable penal charge before it was levied.
- Check whether the lender communicated the levy and the reason for it.
- Confirm the penalty appears as a charge, not as an increase in your loan's interest rate.
- Confirm no interest has been computed on the penalty amount itself.
- Compare the amount with the charges displayed on the lender's website for your loan category.
- If anything does not match, write to the lender's grievance team with the statement entry and these references.
Frequently asked questions
What is the difference between penal interest and penal charges?
Penal interest adds a percentage to your loan's interest rate when you default. RBI's August 18, 2023 circular says penalties for non-compliance with material loan terms shall be treated as penal charges and shall not be levied as penal interest added to the rate of interest charged on the advance.
Can a bank charge interest on the penal charges themselves?
RBI's circular says there shall be no capitalisation of penal charges, which it explains as no further interest computed on such charges. It adds that this does not affect the normal procedure for compounding of interest in the loan account, so regular interest on overdue amounts is a separate question.
Where should my home loan's penal charges be disclosed?
The circular says the quantum and reason for penal charges shall be clearly disclosed in the loan agreement and in the Key Fact Statement as applicable, and displayed on the lender's website. It also says that when reminders for non-compliance are sent, the applicable penal charges shall be communicated.
Can a bank charge individuals more than companies for the same default?
No, not under this circular. It says penal charges on loans sanctioned to individual borrowers for purposes other than business shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance with material terms and conditions.
Last updated 2026-10-28. PropNewz Team.
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