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RBI asks banks not to charge excessive interest

Reserve Bank in it's notification dated 7th March 2007 has asked banks to not charge interest beyond a certain level as it 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 broad guidelines:

i) 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.

ii) Interest 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.

iii) The 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.

iv) An 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.

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.

NOTE- Reserve Bank's Master Circular dated July 1, 2006 has advised 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.

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