The Finance Industry Development Council (FIDC), a prominent representative body of Non-Banking Financial Companies (NBFCs) in India, has recently submitted a formal request to the Reserve Bank of India (RBI) to reconsider the classification of penal interest as ‘charges,’ citing potential tax implications.
In a detailed representation addressed to the RBI, the FIDC expressed concerns regarding the central bank’s circular on fair lending practices. The circular includes guidelines emphasizing the importance of transparent and reasonable disclosure of penal interest or charges. However, FIDC believes that implementing these guidelines may lead to various complications.
Among the challenges highlighted by the FIDC, the risk of imposing Goods and Services Tax (GST) on penal charges stands out. Such a levy could create additional hardships for customers who are already struggling with defaulting on their payments.
The council, represented by Director General Mahesh Thakkar, suggested an alternative approach by proposing that the credit risk premium adjustment should be considered only when there is a significant decrease in the risk profile. This adjustment could be implemented following a comprehensive review of the borrower’s profile across multiple parameters. On the other hand, the FIDC believes that penal interest should be levied from the date of default to discourage unnecessary delays in repayment.
By raising these concerns, the FIDC aims to facilitate a reconsideration of the classification of penal interest as ‘charges’ by the RBI. The council seeks to ensure that any potential tax implications are carefully evaluated, and that the interests of customers already facing financial difficulties are duly taken into account.
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