There have been some practices followed by HFCs/Banks/NBFCs who charge customers interest from the date the loan cheque is prepared or “CUT” and not from the date the cheque is handed over.
Before we jump to any conclusion on this practice being right or not, it is interesting to understand the modality of the practice. While sanctioning the loan, the lender completes required verification and gets the loan documents signed by the applicant(s). After sanction, disbursement is fixed, and cheque is prepared. Disbursement cheque is retained by the lender awaiting deviations and sanctioning conditions. Lenders generally do not differentiate between fixing and making disbursement. With this argument, the day disbursement cheque is prepared, it is also considered to have been given to the customer, who is then charged interest on the amount so disbursed without actual transfer of funds. The actual funds will be transferred to the customer a few days or even weeks later when the cheque is handed over to the customer.
From the lender’s perspective there may be an argument in favour of such a practice, as for the committed disbursement amount, a provision is required in current accounts which does not earn any interest. There are, I am sure multiple “treasury” options to counter that.
There could be other considerations also for such practice, such as loan book growth, increased fee income, interest income, low NPA % in view of higher loan book denominator etc. Realistically these considerations are no more than window display. One big reason which is often used and is a wrong approach is that it helps meet incentive targets and payouts.
Against that, from the customer’s perspective, a question arises – is it valid to charge interest without handing over the cheque? The obvious answer is ‘No’ because practically an applicant becomes a borrower when he gets the loan cheque and then becomes liable to pay interest. A lender need not consider the date of deposit & realization since the value of the disbursement is committed as on the date the loan cheque is handed over. However, if the disbursement is by way of DD or NEFT/RTGS, then charging interest from that date is valid.
The right practice – charge interest from the date of handover of cheque.
And let us not forget… Everyone doing it does not make it right – No one doing it does not make it wrong.
