May 7, 2007
Complaints about excessive interest charged by banks
refer to paragraph 168 of the Annual
Policy Statement for the year 2007-08 (copy enclosed).
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 Reserve Bank's Master Circular DBOD.
Dir.BC.5/ 13.03.00/ 2006-07 dated July 1, 2006 advising 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 (vide paragraph 10.2
of master circular referred to above) to ensure that interest applied does not
exceed principal amount.
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.
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
- 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.
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.
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.
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 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.
In the meantime, please acknowledge receipt.
(P. Vijaya Bhaskar)
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.
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