1.Method of interest calculation has not been changed from the earlier Circular No 12/93. Banks should continue to follow reducing balance method, by taking a year of 365 days. However they must ensure that effective interest rate on per annum basis is disclosed to the customer, displayed on the Board, it is used for calculation and specified in the loan documentation.
2.While reducing balance method of interest calculation will be followed on personal and car loans, average daily outstanding balances will form the basis for interest calculation in all cases.
3.In case of credit cards, the banks may continue to follow the global practice where no interest/ finance charges are levied on the outstanding balance (excluding cash advance transactions) when the new balance outstanding shown in the statement is paid in full by the Payment Due Date. Finance/ interest charges on cash advance may be applied from the transaction date till final repayment.
4.Within the above broad framework, Islamic banks may vary display of interest rates or use appropriate terminology as permitted under the Shariaah.
5.Any bank advertising or propagating ‘Flat’ interest rate must invariably state the equivalent effective rate side by side.