In some cases, banks charge interest and penalties disproportionate to the original loan size and the actual costs incurred by lenders when loan payments are missed, the Central Bank told commercial banks in a letter on January 20.
The regulator's analysis found that when payments are not made on time, interest accrued on overdue debt increases by 1.5-3 times than contractual interest rate, and in some cases reaches 150-180% per annum.
According to the Central Bank, such accruals effectively become an alternative form of interest income for banks.
Furthermore, the regulator noted that daily penalties with no established maximum limit were often applied when interest payments are late, resulting in an annual penalty that can be several times greater than the original loan size.
There have also been cases of additional one-time penalties being applied that are not related to the actual costs incurred by the lender. In some situations, a higher interest rate, a late payment penalty, and a one-time fine are applied simultaneously.
According to the Central Bank, the total additional costs associated with late payments in some cases are several times greater than the cost of bonafide and timely loan servicing. This creates an excessive financial burden on borrowers and makes fulfilling their obligations economically difficult.
The regulator stressed that this practice created an economic model in which it became more profitable for lenders to profit from late payments than to prevent them or facilitate timely repayment.
"Such loan agreement terms objectively incentivize the lender to profit from late payments instead of ensuring payment discipline, and also create the risk of a lack of transparency in the disclosure of loan terms. In particular, the actual financial consequences of defaulting on obligations are not properly assessed by the borrower at the loan decision-making stage," the statement reads.
This practice disrupts the balance of interests between the parties, contributes to higher social risks, an increase in the number of complaints from individuals, and a decline in trust in the banking system, the CB’s letter noted.
The Central Bank emphasizeв that penalties for late performance of obligations must be indemnity-based in nature and considerув it unacceptable to create contractual terms that turn late payments into a source of income for lenders.
The existence of such practices was one of the reasons for the regulator's revision of regulations aimed at establishing clear and transparent financial liability for breach of credit obligations.
