Under pressure from a public interest litigation (PIL) filed by Moneylife Foundation in the Supreme Court, the Reserve Bank of India (RBI) has asked all banks to adopt new external benchmark for providing loans for home, auto and micro and small enterprises (MSME) from 1 April 2019. RBI has also asked banks to keep fixed their spread over the benchmark rate throughout the tenure of the loan. This will possibly stop floating rate customers being cheated by banks in future.
Regular readers would know Moneylife Foundation has been relentlessly campaigning against arbitrary and opaque bank policies with respect to floating rate loans. Borrowers, who have taken loans on a floating rate basis, suffer an immediate increase when interest rates are hiked by the RBI but do not get much relief when rates go down. This makes a mockery of the very concept of ‘floating’ rates. We have highlighted this issue in several articles and our Cover Story “Banksters
28 April-11 May 2017).
The external benchmark now suggested by RBI includes its policy repo rate, government of India 91 days treasury bill yield produced by the Financial Benchmarks India Pvt Ltd (FBIL), government of India 182 days treasury bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL.
RBI has said, "The spread over the benchmark rate — to be decided wholly at banks’ discretion at the inception of the loan — should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract."
This, in other words, means that, with the spread remaining fixed, banks will have to adjust interest rates as per the changes in external benchmark.
However, RBI is asking banks to use the new norms from April next year. It is silent about the previous years of overcharging that flourished brazenly.
Last year, the Dr Janak Raj Committee in its report, "Internal Study Group to Review the Working of the MCLR System" had provided a shocking account of how wide and deep banking malpractices are with regard to floating rate loans. It confirmed every one of our arguments about how banks cheat customers, fudge rates and extort conversion charges.
The RBI study highlighted how banks deviated in an ad hoc manner from the specified methodologies for calculating the base rate and the MCLR, to either inflate the base rate or prevent the base rate from falling in line with the cost of funds.
It says, “Banks have been quite slow in migrating their existing customers to the MCLR regime. Most of the base rate customers are retail or small and medium enterprise (SME) borrowers. Hence, the banking sector’s weak pass-through to the base rate is turning out to be deleterious to the retail and SME borrowers in an easy monetary cycle.”
"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. (See Excess Interest Charged by Banks under Base Rate and MCLR Regime
“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.
RBI refused to act on it. We then had to file a PIL in the Supreme Court.
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 non-banking finance companies (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 to pass through the benefit of a reduction in the interest rates to the existing consumers 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 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.
The Supreme Court directed the RBI 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."
The RBI is yet to reply to respond to the Supreme Court order. We have reminded RBI once again to address the borrowers’ issues. Whatever RBI has announced today, it does not address the previous years’ overcharging, which we wanted addressed.