No Fees on Loans and Credit Cards: Would Banks Obey RBI’s Advice?

India’s central bank has sent a strong signal to lenders: reduce the burden of service charges on consumers. The Reserve Bank of India (RBI), in recent weeks, has nudged banks to lower debit card fees, penalties for minimum balance shortfalls, and late payment charges. The move comes at a time when the retail lending segment, personal loans, auto loans, and small business financing, is expanding at an unprecedented pace.

For customers, this is a timely intervention. Banks earn crores through these charges, but for many low-income customers, the fees often exceed their affordability. With no regulatory cap on such surcharges, RBI’s intervention could shift the balance in favour of borrowers and depositors.

Why RBI Is Targeting Fees on Retail Banking?

India’s retail loan market has grown at double-digit rates over the past three years. With consumers increasingly relying on unsecured personal loans and EMIs, banks have capitalised by charging additional fees. According to BankBazaar data, processing fees on loans range from 0.5% to 2.5%, and late payment penalties can be even higher.

RBI is concerned about two aspects:

1. The disproportionate burden such fees place on low-income account holders.
    
2. The systemic risks posed by aggressive retail lending in pursuit of profits.
    

By urging banks to reconsider their fee structures, the RBI is aiming to strike a balance, supporting retail credit growth while ensuring consumer protection.

How Do Current Bank Charges Impact Customers?

To better understand the magnitude of charges, let’s compare common retail banking fees across categories. These are based on publicly available fee disclosures of major Indian banks.
 

These fees, though small in appearance, accumulate significantly for customers over time. For instance, a borrower taking a ₹5 lakh personal loan could pay up to ₹12,500 upfront as processing fees, excluding GST and other hidden costs.

In short, while banks diversify revenue streams through fees, consumers, especially small borrowers, end up bearing a disproportionate share of the cost.

The Retail Lending Boom: A Double-Edged Sword

Retail lending has been a major driver of India’s credit growth. Personal loans grew by nearly 20% year-on-year in FY25, while credit card spending touched all-time highs. Car loans and small business loans have also expanded rapidly.

Banks benefit from this trend because unsecured loans fetch them higher interest margins. However, RBI officials worry that unchecked growth could mirror the risks seen in other economies where retail credit bubbles led to defaults.

The regulator is thus adopting a two-pronged approach:

• Encourage credit expansion for economic activity.
   
• Rein in exploitative fee practices that disproportionately impact financially weaker households.
   

This is consistent with RBI’s broader financial inclusion agenda, which seeks to expand access to affordable credit while safeguarding consumers.

Comparing India’s Charges with Global Practices

Globally, regulators have taken a stricter approach to capping consumer banking fees. For example, in the US, the Consumer Financial Protection Bureau has capped credit card late fees at $8 (approx. ₹670). In the UK, overdraft charges are standardised to prevent banks from exploiting consumers.
 

India, while pushing for digital inclusion, still allows wide flexibility in how banks set fees. The RBI’s latest nudge suggests it may consider tighter regulations if voluntary moderation does not happen.

The global comparison highlights India’s relative leniency, making the RBI’s recent intervention both necessary and timely.

Industry Reactions and Possible Outcomes

Banking industry insiders are divided. On one hand, reducing fees could hit non-interest revenue, which has become a major income stream for banks. On the other, lower fees may expand customer bases and deepen trust in the formal banking system.

Experts believe:

• Short-term revenue loss is likely for banks.
   
• Long-term gains could emerge from higher account penetration and increased transaction volumes.
   
• Fintech companies may benefit as lower bank fees reduce the competitive edge of alternative payment channels.
   

Some bankers privately argue that instead of nudging, the RBI should issue clear guidelines on fee ceilings to ensure uniformity across banks.

Conclusion

The RBI’s push to cut debit card and loan-related charges is more than a consumer-friendly move; it is a strategic intervention to safeguard retail borrowers in a booming credit market. As India’s banking sector becomes increasingly retail-driven, balancing profit motives with fair consumer treatment will be key.

If banks respond positively, millions of customers could see their annual financial burden reduced. However, if resistance builds, the RBI may well move from persuasion to regulation. Either way, the direction is clear: Indian banking must grow inclusively, not just profitably.

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LoansJagat Team

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