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…
 

 

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COMMENTS

Sanjay K

1 month ago

Whilst I await a response from RBI, LIC sends me a rate revision notice today, 6th Nov 2018, citing hard economic conditions.

This is the first time I am getting an intimation from LIC, should I applaud?

Thanks, MoneyLife. I am going to get the rates corrected and be more active in educating my peers.

Excerpt from the mail:

`You would be aware that in recent times, there has been a sharp increase in the interest rates in the economy and till date, we have always ensured to restrict its impact on your loan account. However,despite our best efforts to absorb the increases, we are left with no alternative but to marginally revise the rate of interest by 30 bps for our housing loan schemes w.e.f. 08th October'2018 (payable in November'2018).The applicable rate for your loan would be 11.85% floating.

If you are making payment through ECS, we shall be advising your bank for effecting the revised payment.

We thank you for your continued support and assure you of our best services.`

Mohammed Atiq ur Rahman

2 months ago

Great initiative MONEYLIFE....Keep on raising the red flag against the Govt institution who is turning a blind eye towards people issues.....One Govt Institution every Indian is Proud will deliver the justice .....

Dayananda Kamath

2 months ago

I am of the opinion that the pil is filed on wrong notion about floating rate policy,and the argument of discrimination may not hold water in legal scrutiny.
But yes there is huge malpractices resorted to the hilt by big new private banks as well as public sector banks since the introduction of floating rate interest schemes.
Culprit is Regulator by vague and wrong implementation of the scheme.
In floating rate the 3 in gradients are a third party rate as base rate. Banks to declare in their interest rate notification what is the base rate and the spread they have taken. And the periodicity of reset. This is not prescribed in policy guidelines nor implemented nor monitored since inception of the policy.

Krishnan Hariharan

2 months ago

I have read many Moneylife articles and Business Standard reports touching on similar subjects where consumers were taken for a ride, be it banks, government agencies drawing attention of the Finance Ministry. I hardly notice any response from the Ministry of Finance. Are they really alive to public grievances? Do they think the public is only to vote for them during elections? God save this 'great' nation!

Harish

2 months ago

Why should the RBI need a Supreme Court Order to reply to a letter which it has kept pending for about a year? There is extreme arrogance in the RBI ranks who treat the general public as dirt. This needs to be corrected through a process of law which would make it mandatory for the RBI to give a full reply [not just an acknowledgement or matter under examination sort of reply] within three weeks for any letter.

divakar s

2 months ago

Great Initiative.... Thanks for your good work ...

RAMANI N .V.

2 months ago

Timely initiative.

Suyash Trivedi

2 months ago

Great intiative,We are with you.I am also facing this, let me know if we contribute towards this

Prakash Patel

2 months ago

I have a housing loan from LIC housing finance with a floating rate of interest. In past whenever interest rate dropped, I had to remind them for the reduction in interest on my loan. They would reluctantly send few forms to sign and were charging some fee for doing this.
Congratulations to ML foundation for raising this issue.

PRAKASH D N

2 months ago

Congratulations to Money Life . I am afraid that Banks may gang up to pressurise RBI to defer a decision in the light of almost all banks making losses. We have to continue the fight. Banks do not loss on depisit front on premature closure as they charge penal interest and pay rate as applicable for the period run as on the date of deposit. Banks mainly lose on bulk deposit front as they pay higher rates.
Let us hope RBI will not prolong a decision.

REPLY

Satyam Savla

In Reply to PRAKASH D N 2 months ago

The problem is more with the private sector banks than the PSU Banks.

PRAKASH D N

2 months ago

Congratulations to Money Life . I am afraid that Banks may gang up to pressurise RBI to defer a decision in the light of almost all banks making losses. We have to continue the fight. Banks do not loss on depisit front on premature closure as they charge penal interest and pay rate as applicable for the period run as on the date of deposit. Banks mainly lose on bulk deposit front as they pay higher rates.
Let us hope RBI will not prolong a decision.

REPLY

Satyam Savla

In Reply to PRAKASH D N 2 months ago

This is exactly where the problem lies. The RBI from the back is controlled by the powerful bank mafia who set the rules keeping RBI in the forefront. Hence we have enhanced card protection rules since that's what the private banks want to protect their interest

Ralph Rau

2 months ago

NBFC like Housing Finance Companies borrow money wholesale at certain rates for certain period. They then extend a loan to the borrower for a similar period with their standard mark-up or margin.

Banks too have contracted to pay long depositors a high rate prevailing when market rates are high. If they then loan these funds to say a housing loan borrower they would need to follow a similar practice as the NBFC Housing Finance company if they are to protect their margins for the duration of the term?

You Bought the Movie on iTunes. But It's Not Yours.
Children of the ’90s will remember huddling around a TV roughly one thousand times thicker than today’s flat screens to watch such titles as “Casper,” “The Lion King,” and “Toy Story” on VHS. Now adults, some may even have children of their own. In fact, we can state with certainty that that is the case. We can also confidently say that most kids today aren’t watching movies on VHS anymore with the advent of the digital age.
 
But as the purchasing of digital goods such as movies, music, and e-books from digital retailers like Amazon and Apple becomes more prevalent, the question of who really owns the content — the customer or the content provider — is up for debate. The VHS era may have had its shortcomings but at least you knew the videotape you purchased was yours when you saw it on the shelf. You can say the same about DVDs. There are no such assurances with a digital library.
 
Just ask Anders Gonçalves da Silva, who, upon learning last month that Apple had deleted three movies from his iTunes library, without warning (sort of), called the company out on Twitter:
 
 
For da Silva’s trouble, which Apple attributed to the content provider’s decision to remove the movies from the Canadian iTunes store, Apple offered him two 48-hour movie rentals on the house. But da Silva had reportedly paid about $20 apiece to “buy” the movies, as opposed to renting them for $5 each, so this was no great compromise. So he kept at it and the tweetstorm went viral and put a damper on the announcement of Apple’s new iPhone releases at the time.
 
But why?
 
How can Apple do this, you ask? It’s right there in the company’s Terms and Conditions, you know, the legal document that only lawyers and the clinically masochistic read. About halfway through the 7,000-word document Apple says that it “reserves the right to change, suspend, remove, disable or impose access restrictions or limits on [content] at any time without notice or liability to you.”
 
This is in stark contrast to the purchasing language Apple uses in its iTunes store.Words like “buy” and “own” take on a whole new meaning, if consumers only knew. Take this Whitney Houston documentary, one of several featured movies right now in the iTunes store:
 
 
FTC commissioner weighs in
 
The tweetstorm did not go unnoticed by regulators. New FTC Commissioner Rebecca Kelly Slaughter wrote on Twitter:
 
 
We’ll be keeping tabs on this one.
 
Find more of our coverage on film here.
 
 
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Equifax Australia to Pay Aus$3.5 million Penalty for Misleading Consumers on Credit Reports
The Australian Federal Court has ordered Equifax Australia Information Services and Solutions Pty Ltd (Equifax) to pay penalties totalling Australian $3.5 million for misleading and deceptive and unconscionable conduct in relation to credit report services. This follows joint submissions by Equifax and the Australian Competition and Consumer Commission (ACCC).
 
In a statement, the ACCC commissioner Sarah Court says, “Equifax’s conduct caused people to buy credit reporting services in situations when they did not have to. Consumers have the legal right to obtain a free credit report under the law.”
 
Equifax admitted it breached the Australian Consumer Law (ACL) in 2016 and 2017, when its representatives made false or misleading representations to consumers during phone calls.
 
Equifax told consumers that its paid credit reports were more comprehensive than the free reports it had to provide under the law when, in fact , they contained the same information.
 
Equifax also admitted it told consumers they would be charged a single ‘one-off’ or ‘one-time’ payment, but failed to disclose that payments for its paid credit report packages would automatically renew unless consumers opted out.
 
“We considered it unacceptable that consumers were denied the knowledge and proper opportunity to opt out of recurring charges from Equifax,” Ms Court said.
 
Equifax also told consumers that the credit score provided in its paid credit reports was the same credit score used by credit providers when that was not always the case.
 
In respect of three vulnerable consumers, Equifax also admitted that it acted unconscionably by using unfair sales tactics and making misleading representations during telephone calls.
 
“It is appalling that Equifax used unfair sales tactics on consumers who were vulnerable,” Ms Court said.
 
“Consumers have a right to receive accurate information from credit reporting companies when they seek advice or services.”
 
“This result sends a strong message to businesses that making misrepresentations and acting unconscionably against consumers will not be tolerated,” Ms Court said.
 
The court also ordered, by consent, that Equifax establish a consumer redress scheme which will allow affected consumers to seek refunds for a 180-day period.
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