RBI/2006-2007/395 RPCD.CO.RF.BC.No.93/07.38.01/2006-07 May
16, 2007 The
Chairman / Chief Executive Officer/Managing Director, All
State Co-operative Banks (StCBs) and District
Central Co-operative Banks (DCCBs) Dear
Sir, Annual Policy Statement
for the year 2007- 08 – Complaints
about excessive interest charged by banks Please
refer to the paragraph 168 of the Annual
Policy Statement for the year 2007-08 (a copy of the extract enclosed). 2.
The Reserve Bank of India has been receiving several complaints regarding levying
of excessive interest and charges on certain loans and advances. In this connection,
a reference is invited to our Circular RPCD.CO.No.RF.BC. Cir.No.85/ 07.38.02/2001-02
dated April 29, 2002, withdrawing the stipulation of Minimum Lending Rate for
all state/central co-operative banks and advising that these banks were free to
determine their lending rates taking into account their cost of funds, transaction
cost, etc. with the approval of their Managing Committee subject to adherence
of transparency. 3.
It will be appreciated that though interest rates have been deregulated, rates
of interest beyond a certain level may be seen to be usurious and can neither
be sustainable nor conforming to normal banking practice. 4.
Boards of banks are, therefore, advised to lay down appropriate internal principles
and procedures so that usurious interest, including processing and other charges,
are not levied by them on loans and advances. In laying down such principles and
procedures in respect of small value loans, particularly, personal loans and such
other loans of similar nature, banks may take into account, inter-alia, the following
broad guidelines: - An
appropriate prior-approval process for sanctioning such loans, which should take
into account, among others, the cash flows of the prospective borrower;
- Interest
rates charged by banks, inter-alia, to incorporate risk premium, as considered
reasonable and justified, having regard to the internal rating of the borrower
and in considering the question of risk, to take into account the presence or
absence of security and the value thereof;
- The
total cost to the borrower, including interest and all other charges levied on
a loan, to be justifiable having regard to the total cost incurred by the bank
in extending the loan, sought to be defrayed and the extent of return reasonably
expected from the transaction;
- An
appropriate ceiling on the interest, including processing and other charges to
be levied on such loans, which may be suitably publicised.
5.
Banks may confirm having put in place suitable principles and procedures in this
regard within a period of three months from the date of this circular. 6.
In the meantime, please acknowledge receipt to our Regional Office concerned Yours
faithfully, (C.S.Murthy) Chief
General Manager-in-Charge
Annual
Policy Statement for the Year 2007-08 Complaints
about Excessive Interest Charged by Banks 168.
The Reserve Bank and the Banking Ombudsmans’ offices have been receiving several
complaints regarding levying of excessive interest rates and charges on certain
loans and advances. Although interest rates have been deregulated, rates of interest
beyond a certain level may be seen to be usurious and can neither be sustainable
nor in conformity with the normal banking prudence. - The
boards of banks are, therefore, advised to lay down internal principles and procedures
so that such usurious interest, including processing and other charges, are not
charged.
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