What changed
RBI issued a circular on May 7, 2007, following complaints about excessive interest and charges on loans. It mandates banks to adopt board-approved policies to prevent usurious rates, with specific guidelines for small-value loans, including prior approval processes and interest ceilings.
What it means for you
Banks must review and tighten their loan pricing frameworks to avoid regulatory action. For small loans, especially personal loans, lenders need to justify total costs (interest plus fees) against actual expenses and reasonable returns. This could compress margins on high-yield products and require more transparent borrower communication.
What you must do
- Review and update board-approved policy on interest rate fixation for loans and advances within three months from the circular date.
- Implement prior-approval process for small-value loans, factoring in borrower cash flows and internal ratings.
- Set internal ceilings on interest and charges for small loans, and publicize these limits.
- Ensure total cost to borrower (interest + charges) is justifiable based on bank's cost of extending the loan.
- Confirm compliance to RBI within three months from the circular date (May 7, 2007).
Who it affects
All commercial banks (excluding RRBs), Bank boards and credit policy committees, Retail and personal loan departments, Small and marginal farmer lending units
What is considered 'usurious' interest under this circular?
RBI does not define a specific rate but states that rates beyond a certain level may be seen as usurious if unsustainable or not conforming to normal banking practice. Banks must set internal principles to avoid such charges.
Does this apply to all loans or only small-value ones?
The circular applies broadly to all loans and advances, but provides specific guidelines for small-value loans, particularly personal loans and similar products. Banks must ensure no usurious interest is levied on any loan.
What is the deadline for compliance?
Banks must put in place suitable principles and procedures within three months from the date of the circular (May 7, 2007) and confirm compliance to RBI.