What changed
RBI reiterated that while interest rates are deregulated, charging excessively high rates is unsustainable and against banking norms. RRBs are now explicitly directed to formulate board-approved principles and procedures to prevent usurious interest, including processing and other charges, on loans and advances.
What it means for you
RRBs must review and formalize their loan pricing frameworks to ensure interest rates and charges are justifiable and not predatory. This will require stronger internal approval processes, risk-based pricing, and transparent disclosure of total costs to borrowers. Non-compliance could invite regulatory scrutiny.
What you must do
- Review and revise internal lending policies to include clear principles preventing usurious interest and charges.
- Establish an appropriate prior-approval process for small-value loans, considering borrower cash flows.
- Ensure interest rates reflect a reasonable risk premium based on internal borrower rating and security.
- Fix and publicize a ceiling on total cost to borrower (interest plus all charges) for such loans.
- Confirm compliance to the respective RBI Regional Office within three months from the date of this circular (May 15, 2007).
Who it affects
Regional Rural Banks (RRBs), Boards of RRBs, Borrowers of small-value personal loans and similar advances
Does this circular apply to all loans or only small-value personal loans?
The circular specifically advises RRBs to lay down principles for small-value loans, particularly personal loans and similar advances, but the broader directive against usurious interest applies to all loans and advances.
What is the deadline for RRBs to put these principles in place?
RRBs must confirm to their respective RBI Regional Office that suitable principles and procedures have been implemented within three months from the date of the circular (May 15, 2007).
What factors should RRBs consider when setting interest rates?
RRBs should consider risk premium based on internal borrower rating, presence or absence of security and its value, total cost incurred by the bank in extending the loan, and a reasonable expected return from the transaction.