Penal Charges and CIBIL Score: What Borrowers Should Know

Penal interest, or a penal charge, is a fee a lender may apply when an EMI is not paid by its due date, and it is separate from the EMI. The effect on your CIBIL score comes from the delayed or missed EMI, which the lender reports to credit bureaus as a Days Past Due (DPD) entry, rather than from the fee itself. Paying the overdue amount stops further delays from being reported, but an earlier DPD entry generally remains on record.

• Penal interest or a penal charge is a fee applied for an unpaid EMI, and it is separate from the EMI.
• A missed EMI is reported to credit bureaus as a DPD entry, which shows how many days the payment was overdue.
• Lenders report repayment status in a regular reporting cycle, so check your credit report after the update.
• A bounced EMI, for example due to insufficient funds or incorrect account details, can lead to an overdue status and a penalty fee.
• Paying the overdue amount promptly stops further delays from being reported, but an earlier DPD entry generally remains on record.
• If a bounce was caused by a bank error, keep proof and raise a dispute through the official CIBIL process or your lender.

Penal charges do not directly determine your CIBIL Score, but the late payment or default that leads to these charges may affect your credit profile. Under RBI's Fair Lending Practice directions, applicable penalties for non-compliance with material loan terms are treated as penal charges rather than being added to the interest rate, and such charges must not be capitalised. Your CIBIL Score is calculated using information in your CIBIL Report, including repayment behaviour, outstanding balances and payment history. Therefore, if an EMI is paid after its due date or remains overdue, the lender may report the relevant payment status, which can negatively affect your CIBIL Score. A penal charge being applied does not itself mean that your score will decrease. Similarly, paying the penal charge later does not necessarily remove any late-payment or overdue information that has already been reported. The actual impact depends on your overall credit history, the nature and duration of the overdue amount, and other information considered in your credit report.

Penal charges vs overdue interest: what's the difference? 

Penal charges and interest on an overdue amount are different concepts under RBI's framework. RBI's FAQ clarifies that its penal charge instructions do not prevent regulated entities from following normal procedures for charging interest on unpaid interest, including unpaid EMI, at the contracted rate until the default is remedied.

The distinction can be understood as follows:

Under RBI's circular, penal charges must be reasonable and proportionate to the non-compliance, and the quantum and reason must be disclosed to borrowers in the applicable loan documentation and Key Fact Statement, where applicable. Do not assume that a late fee, overdue interest and penal charge are interchangeable. Check your loan agreement and applicable account information to understand what has been applied.

How late EMI payments affect your credit health 

Late EMI payments can affect credit health because repayment history and DPD form part of the information used to assess your credit profile. CIBIL defines DPD, or Days Past Due, as the number of days a payment on an account is late for that month. Its report guidance states that a DPD other than the applicable standard on-time indicators is considered negative by lenders.

A late EMI can therefore have two separate consequences:

• Account-level consequence: Applicable overdue interest or penal charges may arise according to the loan terms and applicable rules.
• Credit-report consequence: The lender may report the account's payment status and DPD to the credit bureau.
• Credit-score consequence: Late payments and delinquencies may negatively affect the CIBIL Score.
• Future borrowing consideration: Lenders may review your repayment history when assessing future credit applications.

RBI's January 2024 FAQ on penal charges confirms that default in repayment is treated as non-compliance with a material loan repayment condition. Where a penalty is charged under the applicable framework, it must be in the form of a penal charge rather than penal charges, and the charge cannot be capitalised.

An unpaid EMI can result in overdue amounts and may lead to adverse repayment information being reported to a credit bureau. The longer an overdue amount remains unresolved, the greater the risk that the account's repayment history will show delayed payment information. CIBIL's report guidance explains that DPD records how many days a payment was late and that repayment history is available in the report.

If an EMI has been missed, take action rather than waiting for the next due date:

1. Check the overdue amount
   Review your loan account to identify the unpaid EMI and any applicable charges.
    
2. Make the required payment
   Use an authorised payment method and follow the lender's payment instructions.
    
3. Save the payment proof
   Keep the transaction reference, UTR, bank statement or payment confirmation.
    
4. Check the loan account
   Confirm that the payment has been credited and the overdue amount has been addressed.
    
5. Continue subsequent EMI payments on time
   Clearing one overdue amount does not remove the need to meet future scheduled payments.
    
6. Review your CIBIL Report when appropriate
   Check whether the account information and repayment history have been reported correctly.
    

CIBIL notes that lenders typically take time to update account information after receiving payment, so an account may not reflect a recent payment immediately.

Ways to minimise the impact of late EMI payments 

The most effective way to protect your credit health is to prevent overdue EMIs and maintain consistent repayment behaviour. Penal charges should not be treated as the main credit concern. The underlying missed payment is more relevant to your credit history because CIBIL identifies payment history as a key factor in its scoring methodology.

Use these practical measures:

• Set EMI reminders: Keep alerts for every upcoming EMI due date.
• Maintain sufficient funds: Ensure adequate balance in the designated repayment account at least three days before the due date.
• Monitor your loan account: Regularly check upcoming EMIs, payment status and any overdue amounts.
• Address failed payments: Resolve unsuccessful or missed payments promptly to avoid continued overdue status.
• Prevent prolonged overdue: Take action quickly if an EMI is missed so that the overdue amount does not continue to accumulate.
• Retain payment records: Save payment confirmations, receipts and loan account statements for future reference.
• Review your CIBIL Report: Check your credit report periodically and raise a dispute if you identify inaccurate repayment information.
• Manage additional borrowing carefully: Avoid taking new credit solely to cover an overdue EMI unless the repayment obligation is financially manageable.

If you have already missed an EMI, focus first on clearing the applicable overdue amount and preventing further missed payments. Avoid taking additional borrowing solely to deal with a temporary overdue amount without assessing whether the repayment obligation is manageable.

How to correct incorrect late payment information on your CIBIL Report 

If your CIBIL Report shows incorrect late-payment or DPD information, verify the entry against your loan statement, payment receipts and bank records. Check whether the reported payment date, overdue amount, DPD, outstanding balance or account status matches your actual repayment history. If you identify an error, keep relevant supporting documents, such as payment confirmations, account statements and transaction records. Contact your lender through its official service channel and request correction of the inaccurate information. Retain the complaint or service-request reference for follow-up. Once the lender processes the request, review your CIBIL Report again to confirm that the information has been updated correctly. If the inaccurate entry remains and the matter is eligible for dispute resolution, you may raise a dispute with CIBIL. Remember that paying a penal charge does not automatically remove accurately reported historical late-payment or DPD information. Your credit report should reflect your actual repayment history accurately.