Having received many complaints about excessive interest charged by banks, the RBI, in a notification on Monday, instructed all banks to put an appropriate ceiling on these rates, as well as on other processing charges. It has given them three months time to comply.
"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," said the RBI notification.
"We have the lowest lending rate in the industry, so there is no issue of overcharging for us. Also all our interest rate hikes have to be approved by the board," said KC Chakrabarty, CMD, Indian Bank. He said public sector banks have no vested interest in overcharging as salaries of their employees are not linked to the profits the banks make.
Some of the other measures suggested by RBI are an appropriate prior-approval process for sanctioning loans. The cash flows of the prospective borrower should be looked into, a reasonable risk premium incorporated on the interest rates charged, and the total cost to the borrower including interest and all other charges levied on a loan should be justifiable to the total cost the bank incurs on the loan.
The RBI has also asked banks to suitably publicise the rates they fix, including processing and other charges that could be levied on loans such as small value loans, particularly, personal loans and such other loans of similar nature.
The RBI has also drawn the attention of banks to its earlier circular on advise to banks to have an objective and transparent policy approved by their Boards for the purpose of fixing interest rates on loans and advances. "In the case of short-term advances granted to small and marginal farmers, Reserve Bank has also advised banks to ensure that interest applied does not exceed principal amount," said the circular.