Supreme Court Directs RBI to reply in 6 Weeks on Floating Rates: Moneylife Foundation PIL
The Supreme Court on Monday directed Reserve Bank of India to respond within six weeks to representations made by Moneylife Foundation on the unfair practice of banks regarding floating loans.
The bench of Chief Justice Ranjan Gogoi, Justice SK Kaul and Justice KM Joseph
, said, "Having heard the learned counsel for the petitioners and having considered the matter, we are of the view that, at this stage, the RBI should be directed to communicate its decision in the matter covered by the representation or letter of the petitioner dated 12 October 2017 to the petitioner within a period of six weeks from today. Thereafter the petitioners, if still aggrieved, will be at liberty to approach this Court once again."
Senior advocate Shyam Divan and advocate Jatin Zaveri represented Moneylife Foundation in this public interest litigation (PIL), which highlighted unfair practices adopted by banks and non-banking finance companies (NBFCs), especially while providing loan to new borrowers and by not reducing interest rates even after reduction in monetary policy rates.
During the hearing, Mr Divan said, “Effectively, banks are charging one set of borrowers a rate of interest which is different for similarly placed earlier borrowers. This is gross discrimination and unfair banking practice.”
As per estimates by Moneylife Foundation, the wrongful loss to consumers and borrowers is well in excess of Rs10,000 crore for denial of every 1% of the benefit or reduction in floating interest rate.
Mr Divan told the Bench that, on 26 December 2017, the RBI informed that the representation sent by Moneylife Foundation was under its consideration.
“However, till date the decision remains a secret,” he said.
The petition pointed out tremendous opacity in the floating interest rates calculated by banks for their own customers. At a given time, there is a huge disparity in the interest being charged from old and new customers.
The PIL mentioned two types of unfair practices. One, whenever interest rate goes down, after announcement of lower policy rates by the RBI, lenders do not pass on the benefit of lower rates on housing, education and consumer goods. Second, at the same time, new borrowers are offered a lower interest rate for availing similar loans but existing borrowers are not offered the lower rate.
These two practices and several allied ones (charging arbitrary fees for home loans, education loans and loans for consumer durables and few reset rates. More on this later), are against all principles of natural justice and equity. Moneylife Foundation's petition alleged that this gross discrimination is against in equal protection of law enshrined under Article 14 of the Constitution of India.
Also, while banks and NBFCs are very reluctant to pass benefits of lower interest rates to borrowers, they swiftly raise the lending interest rates the moment the RBI repo rate is raised. This reluctance is manifest in improper practices and stratagems. In certain cases, the banks and NBFCs neither communicate not transmit the benefit of the reduction in the repo rate to the consumers at all, Moneylife Foundation stated in the petition.
Banks and NBFCs offer a number of excuses for not passing benefits of lower policy rates to customers. These excuses include losses that the banks and NBFCs may have suffered in completely unrelated transactions or administrative costs or fixed rates offered by them on term deposits.
On many occasions, banks and NBFCs transmit the benefit of lower rates only partially. Sometimes, banks and NBFCs transmit the benefit several months after reduction of the repo rate, the result being that the reduced EMI / reduction in the loan period takes effect late.
On the contrary, interest rates for deposits are normally reduced almost instantly or with much lesser delay than the loan rates and in some cases, even before the repo rate declaration, in anticipation of the downward adjustments in policy rates.
Other Unfair Practices
Moneylife Foundation had also noticed that though banks and NBFCs are obliged to pass on the benefit of the reduction in the repo rate, they do so only after recovering a charge from the customer, sometimes described as a conversion charge.
No matter how many times may the interest rates may have been reduced, banks and NBFCs, typically, have reset clauses of only once a year. This makes it difficult for the customer to avail benefits of lower interest rates before the reset clause.
Banks get away because of these practices for several reasons.. One, tremendous opacity in the floating rates calculated by the banks and NBFCs in respect of their customers. Two, no action by the regulator RBI, despite it being aware of what is going on.
Last year in October, a study group from RBI, had exposed the ad hoc manner used by banks to deviate from specified methodologies for calculating base rate and marginal cost of funds based lending rate (MCLR).
"The ad hoc adjustments used by banks, included inappropriate calculation of the cost of funds; no change in the base rate even as the cost of deposits declined significantly; sharp increase in the return on net worth out of tune with past track record or future prospects to offset the impact of reduction in the cost of deposits on the lending rate; and inclusion of new components in the base rate formula to adjust the rate to a desired level. The slow transmission to the base rate loan portfolio was further accentuated by the long (annual) reset periods," the Report had said.
Noticing this grave injustice, Moneylife Foundation wrote to Dr Urjit Patel, governor of RBI, requesting to direct banks to calculate the excess interest they have charged (through arbitrary and ad hoc calculations of base rate or MCLR) and refund the money to borrowers, especially retail borrowers and SMEs. “The RBI should also direct banks to set up special helplines to handle complaints from borrowers, whom banks have overcharged over the years. We also request the Reserve Bank to immediately issue circular/master directions asking banks and financial institutions to allow existing borrowers to migrate to MCLR or any new system without any conversion fee or any other charges for the switchover,” the memorandum had said.
The PIL filed by Moneylife Foundation sought justice for a huge section of Indian population including the middle class and lower middle class, who are badly affected by such discrimination. The primary respondent was the RBI. Others named were: ministry of consumer affairs, ministry of finance, Indian Banks’ Association (IBA), National Housing Bank (NHB), Banking Code and Standards Bank of India (BCSBI).
The petition prayed that,
Banking companies and NBFCs should calculate the amount of excess interest that has been charged to the existing borrowers under floating rate regime by denying the benefit of lower rates so as to pass through the benefit of a reduction in the interest rates to the existing consumer and borrowers of home loans, education loans and loans provided for consumer durables.
The amounts calculated above be transmitted to a central corpus under the aegis of the RBI and refund of such overcharged amount be directed to the borrowers by crediting the accounts through a centralised scheme to be framed by the RBI so as to pass through the benefit of a reduction in the interest rates to the consumer and borrowers of home loans, education loans and loans for durables.
Banking companies and NBFCs be directed that insofar as floating rate loans are concerned there can be no conversion charge extracted from customers who are entitled to avail the lower rate.
Banks and NBFCs, with effect from 1 April 2016, should apply to all customers who have availed floating rate loans, the rates computed based on the Master Directions (Interest Rates on Advances), 2016 irrespective of their acceptance;
The periodicity of reset under the MCLR system be conducted quarterly.
Borrowers be intimated of the change in repo rates and the corresponding reset within a day of such change by at least three modes of communications via multiple channels such as email, text messages and over telephone; and, banking companies and NBFCs should publish the methodology of setting the rate of interest and particulars of the spread on their website on a weekly basis.
Here is the Memorandum submitted by Moneylife Foundation to RBI…