The Reserve Bank of India has threatened to extend the Usurious Loans Act to banks if it continues to receive customer complaints about unreasonably high interest rates.
RBI's warning was delivered by Governor Y V Reddy at an address to bank chiefs during the mid-term review of the monetary policy on October 30.
Reddy told bank chiefs he would not hesitate to recommend to Parliament that the ULA be extended to the banking sector if they did not charge reasonable rates of interest.
Banks are currently exempt from the ULA because of an overriding clause in the Banking Regulation Act that puts interest rates charged by banking companies outside judicial scrutiny.
If the ULA, which principally relates to money-lending, is made applicable to banks, borrowers will have the right to file a case in a court if he or she thinks the bank has been unfair in charging high interest rates.
The ULA was enacted to prevent the civil courts from being used to enforce loans that carry excessively high rates.
The immediate trigger for Reddy's warning was rising complaints about banks arbitrarily revising interest rates on fixed rate home loans.
"I hope this threat will work and I will not be forced to take any regulatory action," the RBI governor said.
According to RBI, the maximum interest rate charged on loans was 17.75 per cent by public sector banks, 26 per cent by private sector banks and 28 per cent by foreign banks.
Apart from home loans, banks also charge high rates for a host of other services.
"Banks charge interest rates as high as 50 per cent on credit cards. Apart from this, the late fee and other service charges are also never defined and are not reasonable," said the chairman of a public sector bank.
"This is the practice followed by select banks for which the entire banking system will have to bear the brunt," he added.
This is not the first time that RBI has intervened to ensure banks levy reasonable interest or charges. In September 2006, the central bank constituted a committee to ensure rationality in bank charges.
The committee had listed around 27 basic services and said banks needed to be more transparent in pricing products and services and that customers should be provided upfront information on pricing changes.
Some bankers complained of the lack of a level playing field. "The regulations and supervision process is getting tighter for banks but non-banking finance companies are getting away with murder," said the managing director of a private sector bank.
"NBFCs charge very high interest rates on consumer durable loans and other forms of capital market loans but are not subject to any disclosures or explanation," he added.
