Finance companies ask RBI not to rename penal interest as `charges’ to avoid attracting GST The Finance Industry Development Council (FIDC), which represents non-banking financial companies (NBFCs) in India, has asked the RBI not to rename penal interest as "charges".

The FIDC is concerned that this could lead to penal interest being subject to Goods and Services Tax (GST), which would increase the cost of borrowing for borrowers.

The RBI had issued a circular in 2020 on fair lending practices, which included guidelines on the reasonable and transparent disclosure of penal interest or charges. The FIDC argues that this circular could be interpreted as requiring NBFCs to rename penal interest as "charges".

The FIDC is concerned that if penal interest is subject to GST, this could increase the cost of borrowing for borrowers.

The FIDC also argues that renaming penal interest as "charges" could be misleading to borrowers, as it could give the impression that these charges are optional, when in fact they are not.

The RBI has not yet responded to the FIDC's request.

Here are some additional details about the issue: Penal interest is a fee charged by a lender to a borrower who fails to make a loan payment on time.

GST is a tax on goods and services that is levied by the government of India. The FIDC is concerned that if penal interest is subject to GST, this could increase the cost of borrowing for borrowers. The RBI has not yet responded to the FIDC's request.