RBI/2007-2008/40
DBOD. No.Dir. BC. 6/13.03.00/2007- 08
July 2, 2007 Aashadha 11, 1929(Saka)
All Scheduled Commercial Banks (Excluding RRBs) Dear Sir,
Master Circular - Interest Rates on Advances Please refer to the Master
Circular DBOD.No.Dir.BC.5/13.03.00/2006-07 dated July 1, 2006 consolidating
instructions / guidelines issued to banks till June 30, 2006 on matters relating
to Interest Rates on Advances. The Master Circular has
been suitably updated by incorporating instructions issued up to June 30, 2007
and has also been placed on the RBI website (http://www.rbi.org.in).
Yours
faithfully,
(P. Vijaya Bhaskar) Chief General Manager
MASTER
CIRCULAR ON INTEREST RATES ON ADVANCES Purpose To
consolidate the directives on interest rates on advances issued by Reserve
Bank of India from time to time. Classification
A statutory directive issued by the Reserve Bank in exercise of the powers conferred
by Sections 21 and 35 A of the Banking Regulation Act, 1949. Previous
instructions consolidated This
Master Circular consolidates the instructions on the above subject contained in
the circulars listed in Annex 3. Scope
of Application To
all Scheduled Commercial Banks, excluding Regional Rural Banks. Structure 1.
Introduction 2.
Guidelines 2.1
General 2.2 Benchmark Prime Lending Rate (BPLR) and Spreads 2.3 Determination
of Benchmark Prime Lending Rate (BPLR) 2.4 Freedom to fix Lending Rates 2.5.Floating
Rate of Interest on Loans 2.6.Levying of penal rates of interest 2.7.Enabling
clause in loan agreement 2.8.Withdrawals against uncleared effects 2.9.Loans
under consortium arrangement 2.10. Charging of interest at monthly rests 2.11.
Zero percent Interest Finance Schemes for Consumer Durables 2.12. Excessive
interest charged by banks 3.
Annex 1.
Introduction 1.1.
Reserve Bank of India began prescribing the minimum rate of interest on advances
granted by Scheduled Commercial Banks with effect from October 1, 1960. Effective
March 2, 1968, in place of minimum lending rate, the maximum lending rate to be
charged by banks was introduced, which was rescinded with effect from January
21, 1970, when the prescription of minimum lending rate was reintroduced. The
ceiling rate on advances to be charged by banks was again introduced effective
March 15, 1976, and banks were also advised, for the first time, to charge interest
on advances at periodic intervals, that is, at quarterly rests. In the following
period, various sector-specific, programme-specific and purpose-specific interest
rates were introduced. 1.2.
Given the prevailing structure of lending rates of Scheduled Commercial Banks,
as it had evolved over time, characterised by an excessive proliferation of rates,
in September, 1990, a new structure of lending rates linking interest rates to
the size of loan was prescribed which significantly reduced the multiplicity and
complexity of interest rates. In the case of the Differential Rate of Interest
Scheme under which credit was provided at a rate of 4.0 per cent per annum, and
Export Credit, which was subject to an entirely different regime of lending rates
supplemented by interest rate subsidies, the existing lending rate structure was
continued. 1.3.
An objective of financial sector reform has been to ensure that the financial
repression inherent in administered interest rates is removed. Accordingly, in
the context of granting greater functional autonomy to banks,
effective October 18,
1994, it was decided to free the lending rates of scheduled commercial banks for
credit Iimits of over Rs. 2 lakh; for loans up to Rs. 2 lakh, it was decided that
it was necessary to continue to protect these borrowers by prescribing the lending
rates. For credit limits of over Rs.2 lakh, the prescription of minimum lending
rate was abolished and banks were given the freedom to fix the lending rates for
such credit limits. Banks are now required to obtain the approval of their respective
Boards for the Benchmark Prime Lending Rate (BPLR), which would be the reference
rate for credit Iimits of over Rs.2 lakh. Each bank's BPLR has to be declared
and be made uniformly applicable at all branches. 2.
Guidelines 2.1.
General 2..1.1. Banks
should charge interest on loans / advances / cash credits / overdrafts or any
other financial accommodation granted / provided / renewed by them or discount
usance bills in accordance with the directives on interest rates on advances issued
by Reserve Bank of India from time to time. 2.1.2. The
interest at the specified rates should be charged at monthly rests (subject to
the conditions laid down in paragraph 2.10) and rounded off to the nearest rupee. 2.1.3. Banks
should club term loans and working capital advances together for the purpose of
determining the size of the loan and the applicable rate of interest. 2.1.4. The
schedule of rates of interest as per the current directive in force is given in
Annex 1. 2.2
Benchmark Prime Lending Rate (BPLR) and Spreads 2.2.1. With
effect from October 18, 1994, RBI has deregulated the interest rates on advances
above Rs.2 lakh and the rates of interest on such advances are determined by the
banks themselves subject to BPLR and Spread guidelines. For credit limits up to
Rs.2 lakh, banks should charge interest not exceeding their BPLR. Keeping in view
the international practice and to provide operational flexibility to commercial
banks in deciding their lending rates, banks can offer loans at below BPLR to
exporters or other creditworthy borrowers, including public enterprises, on the
basis of a transparent and objective policy approved by their respective Boards.
Banks will continue to declare the maximum spread of interest rates over BPLR.
2.2.2. Given
the prevailing credit market in India and the need to continue with concessionality
for small borrowers, the practice of treating BPLR as the ceiling for loans up
to Rs. 2 lakh will continue. 2.2.3.
Banks are free to determine the rates of interest without reference to BPLR and
regardless of the size in respect of loans for purchase of consumer durables,
loans to individuals against shares and debentures / bonds, other non-priority
sector personal loans, etc. as per details given in paragraph 2.4. 2.2.4.
BPLR will be made uniformly applicable at all branches of a bank. 2.3.
Determination of Benchmark Prime Lending Rate (BPLR) 2.3.1.
In order to enhance transparency in banks’ pricing of their loan products as also
to ensure that the BPLR truly reflects the actual costs, banks should be guided
by the following considerations while determining their Benchmark PLR: a)Banks
should take into account their (i) actual cost of funds, (ii) operating expenses
and (iii) a minimum margin to cover regulatory requirement of provisioning / capital
charge and profit margin, while arriving at the benchmark PLR. Banks should announce
a Benchmark PLR with the approval of their Boards. b)
The Benchmark PLR will be the ceiling rate for credit limit up to Rs.2 lakh. c)
All other lending rates can be determined with reference to the Benchmark PLR
arrived at as above by taking into account term premia and / or risk premia. Detailed
guidelines on operational aspects of Benchmark PLR have been issued by IBA on
November 25, 2003. 2.3.2.
In the interest of customer protection and to have greater degree of transparency
in regard to actual interest rates charged to borrowers, banks should continue
to provide information on maximum and minimum interest rates charged together
with the Benchmark PLR. 2.4.Freedom
to fix Lending Rates 2.4.1. Banks
are free to determine the rates of interest without reference to BPLR and regardless
of the size in respect of the following loans: i.
Loans for purchase of consumer durables; ii.
Loans to individuals against shares and debentures / bonds; iii.
Other non-priority sector personal loans including credit card dues; iv.
Advances / overdrafts against domestic / NRE / FCNR (B) deposits with the bank,
provided that the deposit/s stands / stand either in the name(s) of the borrower
himself / borrowers themselves, or in the names of the borrower jointly with another
person; v. Finance
granted to intermediary agencies including housing finance intermediary agencies
(list at Annex 2) for on-lending to ultimate beneficiaries and agencies
providing input support.; vi.
Discounting of Bills; vii.
Loans / Advances / Cash Credit / Overdrafts against commodities subject to Selective
Credit Control; viii.
To a co-operative bank or to any other banking institution; ix.
To its own employees; x) Loans covered by refinance schemes of term lending
institutions.
2.5. Floating Rate of Interest on Loans 2.5.1.
Banks have the freedom to offer all categories of loans on fixed or floating rates,
subject to conformity to their Asset-Liability Management (ALM) guidelines. In
order to ensure transparency, banks should use only external or market-based rupee
benchmark interest rates for pricing of their floating rate loan products. The
methodology of computing the floating rates should be objective, transparent and
mutually acceptable to counter parties. Banks should not offer floating rate loans
linked to their own internal benchmarks or any other derived rate based on the
underlying. This methodology should be adopted for all new loans. In the case
of existing loans of longer / fixed tenure, banks should reset the floating rates
according to the above method at the time of review or renewal of loan accounts,
after obtaining the consent of the concerned borrower/s. 2.6.Levying
of penal rates of interest 2.6.1.
Since the Boards of the banks have been empowered to decide the BPLR as also the
spread over BPLR, banks are permitted (with effect from October 10, 2000), to
formulate a transparent policy for charging penal interest with the approval of
their Board of Directors. However, in the case of loans to borrowers under priority
sector, no penal interest should be charged for loans up to Rs.25,000. Penal interest
can be levied for reasons such as default in repayment, non-submission of financial
statements, etc. However, the policy on penal interest should be governed by well-accepted
principles of transparency, fairness, incentive to service the debt and due regard
to genuine difficulties of customers. 2.7.Enabling
clause in loan agreement 2.7.1.Banks
should invariably incorporate the following proviso in the loan agreements in
the case of all advances, including term loans, thereby enabling banks to charge
the applicable interest rate in conformity with the directives issued by RBI from
time to time. 'Provided
that the interest payable by the borrower shall be subject to the changes in interest
rates made by the Reserve Bank from time to time.' 2.7.2.
Since banks are bound by the Reserve Bank's directive on interest rates on loans
and advances, which are issued under Sections 21 and 35A of the Banking Regulation
Act, 1949, banks are obliged to give effect to any revision of interest rates
whether upwards or downwards, on all the existing advances from the date that
the directives / revised interest rate (change in BPLR and Spread) come into force,
unless the directives specifically provide otherwise. 2.7.3.
Paragraphs 2.7.1 and 2.7.2 will not be applicable in case of Fixed Rate Loans. 2.8.Withdrawals
against uncleared effects 2.8.1.
Where withdrawals are allowed against cheques sent for clearing, i.e. uncleared
effects (e.g. uncleared local or outstation cheques) which are in the nature of
unsecured advances, banks should charge interest on such drawals as per the directive
on interest rate on advances. 2.8.2.
The above instruction will not apply to the facility afforded to depositors for
immediate credits in respect of cheques sent for collection, as a measure of customer
service. 2.9.Loans
under consortium arrangement 2.9.1. Banks
need not charge a uniform rate of interest even under a consortium arrangement.
Each member bank should charge rate of interest on the portion of the credit limits
extended by it to the borrower subject to its BPLR. 2.10.Charging
of interest at monthly rests 2.10.1.
Banks were required to switch-over to the system of charging interest at monthly
rests with effect from April 1, 2002. While switching over to the new system,
banks were required to ensure that the effective rate does not go up merely on
account of the switch-over to the system of charging / compounding interest at
monthly rests and increase the burden on the borrowers. Illustratively If
a bank is charging in a borrower’s account an interest rate of 12 percent with
quarterly rests, the effective rate is 12.55 percent. If the bank charges in the
same account an interest rate of 12 percent at monthly rests, the effective rate
comes to 12.68 percent. Banks should, therefore, adjust the 12 percent interest
rate charged to the borrower in such a way that the effective interest rate to
the borrower does not exceed 12.55 percent, as hitherto. Thus, in the above example,
banks should charge interest at 11.88 percent (and not 12 percent). If this is
done, the effective rate, even after compounding at monthly rests will be 12.55
percent. 2.10.2.
Application of interest on monthly rests shall be restricted to all running accounts,
e.g. Cash Credit, Overdraft, Export Packing Credit Accounts, etc. At the time
of changing over to monthly rests, banks may obtain consent letter / supplemental
agreement from the borrowers for the purpose of documentation. 2.10.3.
Interest at monthly rests shall be applied in case of all new and existing term
loans and other loans of longer / fixed tenor. In the case of existing loans of
longer / fixed tenor, banks shall move over to application of interest at monthly
rests at the time of review of terms and conditions or renewal of such loan accounts
or after obtaining consent from the borrower. 2.10.4.
Instructions on charging interest at monthly rests shall not be applicable to
agricultural advances and banks shall continue to follow the existing practice
of charging / compounding of interest on agricultural advances linked to crop
seasons. As indicated in circular RPCD.No.PLFS.BC.129/ 05.02.27/97-98 dated June
29, 1998, banks should charge interest on agricultural advances for long duration
crops at annual rests. As regards other agricultural advances in respect of short
duration crop and allied agricultural activities such as dairy, fishery, piggery,
poultry, bee-keeping, etc., banks should take into consideration due dates fixed
on the basis of fluidity with borrowers and harvesting / marketing season while
charging interest and compounding the same if the loan / instalment becomes overdue.
Further, banks should ensure that the total interest debited to an account should
not exceed the principal amount in respect of short term advances granted to small
and marginal farmers. 2.11.Zero
percent Interest Finance Schemes for Consumer Durables 2.11.1.
Banks should refrain from offering low / zero percent interest rates on consumer
durable advances to borrowers through adjustment of discount available from manufacturers
/ dealers of consumer goods, since such loan schemes lack transparency in operations
and distort pricing mechanism of loan products. These products do not also give
a clear picture to the customers regarding the applicable interest rates. Banks
should also not promote such schemes by releasing advertisement in different newspapers
and media indicating that they are promoting / financing consumers under such
schemes. They should also refrain from linking their names in any form / manner
with any incentive-based advertisement where clarity regarding interest rate is
absent. 2.12.
Excessive interest charged by banks 2.12.1.
Though interest rates have been deregulated, charging of interest beyond a certain
level is seen to be usurious and can neither be sustainable nor be conforming
to normal banking practice. Boards of banks have, therefore, been advised to lay
out 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 should
take into account, inter-alia, the following broad guidelines:
- An appropriate
prior-approval process should be prescribed 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, should incorporate risk premium as considered
reasonable and justified having regard to the internal rating of the borrower.
Further, in considering the question of risk, the presence or absence of security
and the value thereof should be taken into account.
- The
total cost to the borrower, including interest and all other charges levied on
a loan, should be justifiable having regard to the total cost incurred by the
bank in extending the loan, which is sought to be defrayed and the extent of return
that could be reasonably expected from the transaction.
- An
appropriate ceiling should be fixed on the interest, including processing and
other charges that are levied on such loans, which should be suitably publicised.
Annex
1 Interest
Rate Structure for all Rupee Advances including Terms Loans of Commercial
Banks Rate
of Interest (Per cent per annum) |
1. |
(a) |
Up
to and inclusive of Rs.2 lakh | |
Not
exceeding Benchmark Prime Lending Rate (BPLR) |
|
(b) |
Over
Rs.2 lakh | |
Banks
are free to determine rates of interest subject to BPLR and spread guidelines.
Banks may, however, offer loans at below BPLR to exporters or other creditworthy
borrowers including public enterprises based on a transparent and objective policy
approved by their Boards. |
2 |
Export
Credit | |
Applicable
for the period up to October 31, 2007 |
Pre-shipment
Credit | |
(a) |
Up
to 180 days | | |
Not
exceeding BPLR minus 2.5 percentage points | |
(b) |
Against
incentives receivable from Government covered by ECGC Guarantee (up to 90 days) | |
Not
exceeding BPLR minus 2.5 percentage points |
|
Post-shipment
Credit | | |
|
(a) |
On
demand bills for transit period (as specified by FEDAI ) | |
Not
exceeding BPLR minus 2.5 percentage points | |
(b) |
Usance
Bills | | |
| |
(for
total period comprising usance period of export bills, transit period as specified
by FEDAI and grace period wherever applicable) | | |
| |
(i) |
Up
to 90 days | |
Not
exceeding BPLR minus 2.5 percentage points | | |
(ii) |
Up
to 365 days for eligible exporters under the Gold Card Scheme | |
Not
exceeding BPLR minus 2.5 percentage points | |
(c) |
Against
incentives receivable from Government (covered by ECGC Guarantee) up
to 90 days | |
Not
exceeding BPLR minus 2.5 percentage points | |
(d) |
Against
undrawn balances (up to 90 days) | |
Not
exceeding BPLR minus 2.5 percentage points | |
(e) |
Against
retention money (for supplies portion only) payable within one year from the date
of shipment (up to 90 days) | |
Not
exceeding BPLR minus 2.5 percentage points |
Note
| 1.
Since these are ceiling rates, banks are free to charge any rate below the ceiling
rates. | |
2.
Interest rates for the above-mentioned categories of export credit beyond the
tenors as prescribed above are deregulated and banks are free to decide the rate
of interest, keeping in view the BPLR and spread guidelines. |
3. |
Education
Loan Scheme | |
Up
to Rs. 4 lakh |
Not
exceeding BPLR | |
Above
R. 4 lakh |
BPLR
+ 1% |
Note: |
1.
The interest to be debited quarterly/ half yearly on simple basis during the Repayment
holiday/ Moratorium period. | |
2.
Penal interest @2% be charged for loans above Rs. 2 lakh for the overdue amount
and overdue period. |
4. |
DRI
Advances 4.0% |
5. |
Banks
are free to determine the rates of interest without reference to BPLR and
regardless of the size in respect of the following loans: |
|
(a) |
Loans
for purchase of consumer durables |
|
(b) |
Loans
to individuals against shares and debentures / bonds |
|
(c) |
Other
non-priority sector personal loans including credit card dues |
|
(d) |
Advances
/ overdrafts against domestic / NRE / FCNR (B) deposits with the bank, provided
that the deposit/s stands / stand either in the name(s) of the borrower himself
/ borrowers themselves, or in the names of the borrower jointly with another person |
|
(e) |
Finance
granted to intermediary agencies (excluding those of housing) for on-lending to
ultimate beneficiaries and agencies providing input support. |
|
(f) |
Finance
granted to housing finance intermediary agencies for on-lending to ultimate beneficiaries. |
|
(g) |
Discounting
of Bills |
|
(h) |
Loans
/ Advances / Cash Credit / Overdrafts against commodities subject to Selective
Credit Control. |
6. |
Loans covered by participation in
refinancing schemes of term lending institutions |
Free
to charge interest rates as per stipulations of the refinancing agencies without
reference to BPLR |
Note: Intermediary
agencies are indicated in Annex 2. |
Annex
2 An
Illustrative list of Intermediary Agencies 1.
State sponsored organisations for on-lending to weaker sections. Weaker sections
include – i)
Small and marginal farmers with landholdings of 5 acres and less, and landless
labourers, tenant farmers and share-croppers; ii) Artisans,
village and cottage industries where individual credit requirements do not exceed
Rs. 50,000/-; iii) Beneficiaries
of Swarnjayanti Gram Swarozgar Yojana (SGSY); iv) Scheduled
Castes and Scheduled Tribes; v) Beneficiaries
of Differential Rate of Interest (DRI) scheme; vi) Beneficiaries
under Swarna Jayanti Shahari Rozgar Yojana (SJSRY); vii)
Beneficiaries under scheme of Liberation and Rehabilitation of Scavengers
(SLRS); viii) Advances
to Self-Help Groups (SHGs); ix) Loans
to distressed poor to repay their debt to informal sector, against appropriate
collateral or group security; Loans
granted under (i) to (viii) above to persons from minority communities as may
be notified by Government of India from time to time. In
states, where one of the minority communities notified is, in fact, in majority,
item (ix) will cover only the other notified minorities. These States/Union Territories
are Jammu and Kashmir, Punjab, Sikkim, Mizoram, Nagaland and Lakshadweep.
2.
Distributors of agricultural inputs / implements. 3.
State Financial Corporations (SFCs) / State Industrial Development Corporations
(SIDCs) to the extent they provide credit to weaker sections. 4.
National Small Industries Corporation (NSIC). 5.
Khadi and Village Industries Commission (KVIC). 6.
Agencies involved in assisting the decentralised sector. 7.
State sponsored organisations for on-lending to the weaker sections. 8.
Housing and Urban Development Corporation Ltd. (HUDCO). 9.
Housing Finance Companies approved by National Housing Bank (NHB) for refinance. 10.
State sponsored organisations for SCs / STs (for purchase and supply of inputs
to and / or marketing of output of the beneficiaries of these organisations). 11.
Micro Finance Institutions / Non-Government Organisations (NGOs) on-lending to
SHGs.
Annex
3 List
of directives/circulars/instructions which have been consolidated
in the Master Circular on 'Interest Rates on Advances' |