How to calculate penal charges under the RBI 2024 rules
CA Anil Agarwal · How-to · 2026-08-12 · 8 min read (estimated)
Since 1 April 2024, a penal amount on a defaulted loan is a charge, not interest. Calculate it on the amount in default for the period of the default, at a rate or fee your board has approved and your loan agreement and Key Facts Statement disclose. Do not add it to principal, do not compute interest on it, and do not recognise it as income until it is received.
That is the rule. What follows is how to implement it without producing two contradictory numbers.
What changed on 1 April 2024?
The RBI's circular on fair lending practice and penal charges in loan accounts (RBI/2023-24/53, dated 18 August 2023) took effect for new loans from 1 April 2024, and for existing loans at their next review or renewal.
Before it, most lenders charged "penal interest" — an additional rate applied to the overdue amount, which then behaved like interest: it capitalised, it compounded, and it accrued into income. The circular ended that.
| Penal interest (before) | Penal charges (after) | |
|---|---|---|
| Nature | An additional rate | A charge |
| Added to principal | Usually | No |
| Interest computed on it | Yes | No |
| Income recognised | On accrual | On receipt |
| Disclosure | Often in the fine print | Agreement and KFS, with quantum and circumstances |
| Same default charged twice | Sometimes, under two names | Not permitted |
The circular also requires that the quantum be reasonable and commensurate with the default, and that penal charges on loans to individuals for purposes other than business are not higher than those on comparable non-individual borrowers.
How do you calculate a penal charge?
Two forms are common, and both are compliant if disclosed.
A percentage of the overdue amount, per period of default. For example 2% per month on the overdue instalment. On an instalment of ₹1,33,273 that is thirty-one days overdue:
1,33,273 × 24% per annum ÷ 365 × 31 days = ₹2,716A flat fee per default event. For example ₹500 per bounced instalment. Simpler and increasingly common for small-ticket lending.
Three details decide whether the implementation is right:
Charge on the amount in default, not the whole loan. The overdue instalment, or the overdue amount — not the principal outstanding.
Charge for the period of the default, and only once for each day. An instalment that remains unpaid keeps attracting the charge for as long as it stays unpaid. But a day already charged must not be charged again — a system that recomputes from day one each time it runs will inflate the charge every night.
Stop at NPA. From the date an account is classified non-performing, income is recognised on a receipt basis. Continuing to levy fresh charges on it is inconsistent with that treatment; the convention is to stop new levy and suspend what is outstanding.
Why the borrower's statement and the trial balance differ
This is the part that confuses implementers, and it is not a contradiction.
- The borrower's liability arises when the charge is levied. They owe it from that date, and
their statement of account should show it, because a statement that hides a charge until it is collected is a statement they cannot reconcile.
- The lender's income arises when the charge is received. Under the receipt basis, nothing
reaches the general ledger until money arrives, so the trial balance does not show it.
One number cannot serve both. The correct implementation carries the levy as a shadow entry — recorded against the account, visible on the statement, forming part of what is owed — and posts to the general ledger only on collection.
A useful check: levy a charge and then look at the trial balance. If it moved, the treatment is accrual-based and inconsistent with the receipt basis.
What about the principal outstanding?
The penal charge does not go into it.
This matters more than it sounds, because the principal outstanding is what feeds the foreclosure quote, the loan-to-value ratio, the provisioning computation and the balance quoted to the borrower. A penal charge folded into principal inflates every one of them, and inflates the interest computed thereafter — which is the compounding the circular prohibits, arriving by a side door.
Keep three balances distinct: principal outstanding, interest (accrued or in suspense), and charges (penal, bounce, costs). The total payable is their sum; none of them is inside another.
Waiving a penal charge
Waivers are ordinary in collections, and the two things that make them defensible are authority and a record.
- Authority should be tiered. A partial waiver within a board-approved cap is one level; a full
or above-cap waiver is another. The system should enforce the tier rather than rely on a convention.
- A reason is not optional. "Customer requested" tells an auditor nothing. The record should show
who waived what, when, and why.
- A waived shadow charge posts nothing. If the charge never reached the general ledger, waiving it
does not either. A waiver expense entry against a charge that was never booked is a fabricated movement.
Common mistakes
- Penal amounts inside the principal outstanding. The most common, and it breaks LTV,
foreclosure quotes and provisioning at once.
- Recognising the charge as income when levied. Accrual treatment under a receipt-basis rule.
- Recomputing the whole charge each night. Charges the same days repeatedly.
- Charging once and then stopping. The opposite error: once an instalment's charge has been
collected, a system that will not open a new period lets the account stay overdue indefinitely for free.
- Continuing to levy after NPA. Inconsistent with receipt-basis recognition.
- Calling it penal interest in the agreement. The label matters: it is what a borrower's counsel
will quote back.
- Two charges for one default. A "late fee" and a "penal charge" for the same missed instalment
is the double-charging the circular prohibits.
A worked example
A loan against property with a monthly instalment of ₹1,33,273. The scheme's penal charge is 24% per annum on the overdue instalment, no grace, GST as applicable.
- Instalment 1 falls due 12 July, unpaid. On 12 August, the day-end job computes 31 days of
default: ₹2,716.
- Instalment 2 falls due 12 August, unpaid. One day of default on 12 August: ₹88.
- The account carries ₹2,804 of penal charges as a shadow balance. The borrower's statement shows
both levies. The trial balance shows nothing.
- The borrower pays one instalment on 12 August. The appropriation order puts charges before
interest and principal, so ₹2,804 is collected. Now it reaches the general ledger, as penal income, with the GST split to the output register.
- Instalment 2 remains unpaid. By 1 September it is twenty days into default. The system levies
for the days since the last charged period — not from day one again — and the new charge is the difference.
The last point is the one that bites both ways. A system that never opens a second period lets an instalment stay unpaid for a year having been charged once, for one day.
How Lenviq handles this
Penal amounts are levied by the nightly job as shadow entries against the instalment they arose on, never capitalised to principal and never compounded. They reach the general ledger only when collected, with the GST split by place of supply and written to the output register. A still-unpaid instalment keeps attracting charges for the days beyond those already levied, never for days already charged. Levy stops at NPA and outstanding charges are suspended. Waivers are tiered by permission against the scheme's own cap, require a reason, and post nothing where nothing was booked.
The compliance page states the position with its citation.
Frequently asked questions
Can penal charges be added to the principal outstanding?
No. Under RBI/2023-24/53 penal amounts are charges, not interest, and are not capitalised. Adding them to principal also produces compounding indirectly, since interest is then computed on a balance that includes them.
Should penal charges appear on the borrower's statement before they are collected?
Yes. The borrower's liability arises on levy, so a statement that omits the charge until collection is one they cannot reconcile. What should not appear until collection is the entry in the general ledger — the borrower's statement and the books are answering different questions, and both are right.
Can an NBFC charge penal charges on an account that has become NPA?
The consistent treatment is to stop new levy at classification and suspend what is outstanding, since income on the account is recognised on a receipt basis from that date. What has already been levied remains owed by the borrower and remains claimable.
Is GST payable on penal charges?
Where GST applies to the charge, it is collected with it and, being a charge rather than interest, should be split by place of supply and written to the output register that the GST returns are built from. A charge whose GST lands in a catch-all ledger with no register entry will not reconcile to the return.
What is a reasonable penal charge?
The circular requires the quantum to be reasonable and commensurate with the default, and not discriminatory against individual borrowers taking loans for non-business purposes. It does not prescribe a number. What it does require is that the quantum and the circumstances of levy are disclosed in the loan agreement and the Key Facts Statement — and a charge not disclosed there cannot be recovered.
Related reading: Penal charges are charges · RBI compliance for NBFCs · How to automate NPA classification · What goes into the KFS APR
Ask for a walk-through if you want to see the shadow entry and the receipt-basis posting side by side.
Read next
- Spreadsheets vs loan management software: when an NBFC has to move
What spreadsheets do well for a small book, the five points at which they stop working, and how to migrate without losing the history.
- NBFC income recognition: what the RBI rules require once an account turns bad
Why accrued interest is reversed at classification, what receipt basis means in the ledger, and the half of the rule most systems never implement.
- The Key Facts Statement: what an NBFC must disclose, and what it costs to get wrong
What goes into a KFS, how the APR is computed, and the clause that stops a lender recovering a charge it failed to disclose.
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