What changed
A joint NABARD-RBI study revealed that some RRBs compound interest on agricultural loans at quarterly or half-yearly intervals, ignoring the cropping or harvesting cycle. This violates existing RBI instructions. The circular directs sponsor banks and RRBs to correct software and manually re-credit excess interest.
What it means for you
RRBs must immediately review their loan accounting systems to ensure interest compounding matches the crop cycle, not arbitrary calendar periods. Non-compliance could lead to customer grievances and regulatory action. Sponsor banks are on the hook to fix software flaws that fail to separate principal from interest before compounding.
What you must do
- Audit your agri loan portfolio to identify accounts where interest was compounded outside the cropping/harvesting cycle.
- Coordinate with your sponsor bank to modify or replace loan software to segregate principal and interest correctly.
- Re-credit excess interest charged to affected borrowers and report the action to your RBI Regional Office and NABARD.
- Train staff on manual accounting to prevent human errors in interest calculation.
Who it affects
All Regional Rural Banks (RRBs), Sponsor banks of RRBs, Agricultural loan borrowers of RRBs
Why is compounding interest quarterly a problem for agri loans?
Agricultural income follows crop cycles, not fixed calendar quarters. Compounding quarterly can overcharge farmers who repay only after harvest, violating RBI's priority sector lending guidelines.
What should RRBs do if their software cannot separate principal and interest?
RRBs must work with their sponsor bank to upgrade or replace the software. In the interim, manual corrections and re-crediting of excess interest are required.
Do RRBs need to report corrective actions to anyone?
Yes, RRBs must advise their respective RBI Regional Office and NABARD after re-crediting excess interest.