Late Payment Fee and Late Payment Interest

Most of the societies charge late payment charges either as one time penalty or interest (based on a rate on interest on unpaid / delayed interest amount) or both. These penalties and interest on one hand act as a deterrent for the resident/consumer and help to improve collection for the society and on the other hand, they compensate for the financial cost for the society. So what the best practices for charging of late payment penalty and interest? What are the important factors for charging these?

 

It may look simple but there are multiple factors to be looked for these charges:

  • Duration for which interest needs to be charged

  • The amount on which the interest need to be charged

  • Threshold amount

  • Whether to charge penalty or interest or both

  • Amount of penalty

  • Rate on Interest

Let us first take the duration. Typically, the duration is from the due date to the payment date or the next bill date. This however could be application for the full bill amount. But what about the arrears of the previous bill in the current bill? It may be a useful to charge interest on the previous bill arrears for the duration of bill date to payment date as well.

The amount question is partially answered above. After the bill due date, penalty / interest can be charged on the entire bill amount. While the society may levy interest penalty on the previous bill arrears as well. It is important to understand that as a good practice, the interest on current charges should be charged only after the payment due date.

There should be a minimum bill or dues amount for the late fee especially if the penalty is being charged. For example, the penalty could be applicable if the remaining dues are more than Rs 500 or Rs 1000 or Rs 5000 for different societies. It is however ok not to have any threshold on the interest charges as the interest is any way proportional to the amount.

It is a bit tricky whether to charge both the penalty and the interest rates. There are really no recommendations. A society need to balance between these two to deter the residents. It is the rates which decide whether one should charge both or one of the options.

Let us now look at penalty amount. There are no fixed guidelines. A society can typically charge a minimum flat amount as penalty amount above a threshold of arrears. This is typically charged on electricity bills, where the society has an option to disconnect electricity as well. It is important for the society to look at how a public utility in that zone charges the penalty amount and use the same criteria to set-up its own penalty.

Coming to the point of interest rates, once again there are no fixed guidelines. On one hand there are credit card interest rates which can be to the tune of 36-49% per annum; on the other hand there are penal interest rates on service tax charged by the government such as 18% per annum. A good practice for a society is to charge this rate (18%) to the user.

One of the important thing for a society is that the resident should be encouraged to pay a partial amount at least when the over dues / penalties and interest are mounting up. The penalty and interest should not be decided such that the resident does not have any incentive to make partial payment. Typically it happens when the society does not have keep penalty proportional to the dues amount.

Please do share your thoughts and feedbacks as comments on this article. Please do reach out to us at This email address is being protected from spambots. You need JavaScript enabled to view it. as well.

Add comment


Security code
Refresh

Additional information