What are penal charges?
What a lender may levy for a default — as a charge, not as extra interest.
The amount a lender levies when a borrower misses a payment or breaches a term. Since April 2024 these are charges and not interest, and the distinction is not cosmetic — it decides whether the amount can compound, whether it can be added to the loan, and when it may be recognised as income.
How are penal charges calculated?
On the overdue amount, for the days it was overdue beyond any grace the lender has chosen to give, at a rate the lender must have disclosed. What it may NOT do is as important: it does not compound, it is not added to principal, and it does not itself attract interest.
Penal charges: a worked example
An instalment of ₹25,000 is thirty days late. A penal charge is levied on that overdue amount for the chargeable days and appears on the borrower's statement immediately. Nothing has yet reached the profit and loss account — that happens only when the borrower actually pays it. So the statement shows the charge and the books do not, and both are right.
Why do penal charges matter?
The old treatment let a penalty behave like interest: it compounded, it was capitalised into the loan, and a borrower already in difficulty was pushed further into it by arithmetic. Removing that is the point of the change, and a system that levies penal amounts the old way is now non-compliant regardless of what the loan agreement says.
What the regulations say about penal charges
The Reserve Bank's direction on penal charges, effective 1 April 2024: penal charges rather than penal interest, no capitalisation, no compounding, and disclosure of the quantum and reason.
What a lending system has to do about penal charges
Levied nightly as a shadow entry with no accounting posting, because income is recognised only on receipt. When a payment arrives it is applied across the loan-level buckets first — costs, bounce, penal, in the order the scheme sets — and only then to interest and principal, oldest instalment first. Levy stops when an account turns non-performing, and existing charges are suspended; recovery on them still posts on receipt.
Related terms
- Overdue — An amount the lender demanded and the borrower did not pay.
- DPD (days past due) — How many days an instalment has been overdue.
- NPA (non-performing asset) — An account where payment is overdue beyond the prescribed period.
- KFS (Key Facts Statement) — A standard-format summary of what a loan actually costs.
From the people who wrote this
Run your lending on Lenviq
The section above describes what a lending system has to do about this term. Lenviq does it — on every account, computed at day-end, with the direction it comes from recorded against it.
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