2. The Reserve Bank and Banking
Ombudsmans' offices have 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 UBD.No.DS.PCB.Cir.42/13.04.00/2001-02 dated April
29, 2002 permitting UCBs to determine their lending rates taking into account
their cost of funds, transaction costs etc with the approval of their Board. However,
banks were advised to ensure that the interest rates charged by them are transparent
and known to all customers. Banks were also required to publish the minimum and
maximum interest rates charged on advances and display the information in every
branch.
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 be conforming
to normal banking practice.
4. Boards
of banks are, therefore, 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 may take into account, inter-alia,
the following broad guidelines:
I.
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.
II. 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.
III. 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.
IV. 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 may 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.
V.
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. The small and marginal farmers for the purpose shall include those with
land holding of 5 acres and less.
VI. An appropriate ceiling
may be fixed on the interest, including processing and other charges that could
be levied on such loans, which may be suitably publicised.
5.
Banks should put in place suitable principles and procedures in this regard within
a period of three months from the date of this circular.
6.
Please acknowledge receipt to the Regional Office concerned of the Reserve Bank.
Yours faithfully
(N.S.Vishwanathan)
Chief
General Manager –in-Charge.