How to Identify and Address Interest Rate Overcharges

Why Your Business Loan May Be Costing More Than You Think

In today’s credit-driven business environment, most companies—large or small—rely on working capital loans, term loans, or credit lines from banks and NBFCs. While interest rates seem “fixed” or “agreed upon,” many borrowers unknowingly pay more than what was promised.

From ambiguous and unclear sanction letters to hidden spreads, banks can (and often do) slip in additional charges that silently inflate your borrowing costs. 

This newsletter will help you uncover 

• How interest rate overcharges happen, 
• How to detect interest rate overcharge, and 
• How to fix interest rate overcharges.

The Invisible Burden: What Are Interest Rate Overcharges?

Interest rate overcharges occur when the effective rate of interest paid by a borrower is higher than the rate agreed upon in the sanction letter or loan agreement. This can be caused by:

• Incorrect application of spreads over benchmark rates (e.g., MCLR, Repo).
• Sudden changes in benchmark rates without proper borrower communication.
• Interest charged on non-drawing or over-limit amounts.
• Compounding interest methods that violate contractual norms.

The impact? Over a 3- to 5-year loan, even a 0.5–1% extra interest can translate into lakhs of rupees in additional cost for SMEs.

Where and Why These Overcharges Happen

Let’s break it down:

1. Ambiguous and Unclear Sanction Letters

Many SME borrowers overlook the jargon used in the sanction letter while signing it. Most borrowers don’t revisit the sanction letter after signing. But buried in those 10–20 pages are critical clauses that are raising your borrowing cost:

• Spread adjustments “at bank’s discretion”
• Floating rates pegged to internal benchmarks
• Annual reviews that reset rates silently

These are open invitations for banks to raise your rate later, often without your proactive knowledge.

2. Lack of Transparency in Rate Calculation

Even when linked to external benchmarks (like Repo Rate), some banks charge margins or spreads not clearly explained in writing. Without periodic statements or account analysis, these go unnoticed. It is advisable for SMEs and other business borrowers to keep a close eye on every interest calculated and paid during the loan tenure.

3. Penalty Interest for Technical Defaults

Late submission of stock statements, delays in documentation, or even balance shortfalls can lead to penal interest—sometimes applied silently and retrospectively. Be on time every time with advanced software by BankKeeping and a Compliance Calendar that helps businesses fulfil their obligations towards the banks as borrowers regularly.

4. Wrong Rate Application

Manual errors, system mismatches, or updates not being applied to your account after repo rate cuts—all of these cause unintended overcharges. Sometimes interest is charged from the date of sanction rather than disbursal, on other occasions it is noticed that Double EMI’s have been deducted. 

Steps to Detect Bank Overcharges 

Step 1: Re-read Your Sanction Letter and Look specifically for:

• Interest Rate: Is it floating or fixed?
• If floating, what is the base rate (e.g., Repo, MCLR)?
• What spread or margin is applied?
• Are there conditions for revision?

Step 2: Check Interest Debits on Bank Statements

Match interest debited vs. sanctioned rate. E.g., if your sanction letter says Repo + 3% and Repo is 6.5%, your effective rate should be 9.5%. If you’re charged more—flag it.

Step 3: Perform a Loan Audit or Use Third-party Tools

Professional tools (like the Bankkeeping platform) audit your loan accounts and flag overcharges, delayed rate pass-throughs, and even misapplied penalty interest.

How to Address and Rectify Overcharges

Here’s how you can take control:

1. Raise a Formal Dispute with the Lender

If you identify a discrepancy, write to your Relationship Manager and Credit Head citing:

• Sanction terms
• Benchmark rate on the date
• Interest actually charged

Attach a comparative table. Request reversal of excess charges.

2. Escalate Using RBI Fair Practice Guidelines

Borrowers have the right to fair disclosure and communication. If the bank does not respond, escalate to the internal banking ombudsman or RBI grievance portal with complete documentation.

3. Demand a Rectification and Revised Repayment Schedule

If the excess interest has affected your repayment schedule or EMIs, ask the bank to reissue the amortization schedule or adjust future dues accordingly.

4. Build Interest Clauses into Future Loan Agreements

For new or renewed facilities:

• Seek clear mention of benchmark, margin, reset frequency, and notice period
• Try for a cap on spread increase (e.g., max 3%)
• Insist on interest only on utilized amounts, not sanctioned limits

Real Consequences of Ignoring Overcharges

If you overlook these, the price is steep:

• Your credit cost balloons, eating into business margins.
• Future loan renewals may be offered at higher-than-deserved pricing.
• Cash flows get misaligned, affecting vendor and payroll cycles.
• You may miss better refinancing opportunities due to inaccurate interest history.

Best Practices to Prevent Future Overcharges

1. Conduct Annual Loan Reviews
   Match sanctioned rate vs. actual charged and track spread revisions.
2. Automate Checks with Tech Tools
   Bankkeeping’s Interest Rate Tracker alerts you if you’re being charged higher than agreed—benchmark-linked loans are dynamically compared with current market rates.
3. Train Your Finance Team
   Your accountant should know how to extract and review sanction letters, and loan ledgers.

Frequently Missed Triggers

Here are some common hidden culprits behind overcharges:

• Rate not revised post RBI Repo cut
• Bank considers entire sanctioned limit, not drawing power, for interest calculation
• Penal rate applied for minor covenant breaches
• Delayed renewal triggering higher “temporary” rate

Case Study: A ₹12 Lakh Surprise

A mid-sized exporter from Gujarat discovered—via a Bankkeeping review—that over 2.5 years, his CC limit of ₹8 crore had been charged 0.75% higher than what his sanction terms stated. The root cause: the bank did not revise his spread when the base rate changed. Total overcharge: ₹12.4 lakhs. After negotiation and evidence, the bank reversed ₹9.2 lakhs.

Final Thoughts: Don’t Let Your Banker Decide Your Rate Alone

Interest rate overcharges are more common than you think—and more avoidable than you imagine. The key is awareness, documentation, and proactive monitoring.

Instead of assuming the system works in your favor, build a control layer that puts you back in charge.

Take Control of Your Loans with Bankkeeping

Track interest debits. Detecting errors. Negotiate better.

Fair loan pricing begins with Bankkeeping.