What changed
RBI reiterated that despite deregulated interest rates, charging excessively high rates is unsustainable and against banking prudence. It mandated boards of StCBs and DCCBs to establish internal principles and procedures to prevent usurious interest, including processing and other charges, on loans and advances. The circular specifically targets small-value personal loans and similar products, requiring prior approval processes, risk-based pricing, and cost-justified total charges.
What it means for you
Banks must now formalize internal guardrails to avoid predatory lending practices, especially for small-ticket loans. This could lead to tighter credit assessment and pricing discipline, potentially reducing high-margin lending but improving customer trust and regulatory compliance. Lenders need to review their loan pricing models to ensure they are justifiable and transparent.
What you must do
- Review and revise internal lending policies to include a prior-approval process for small-value loans, considering borrower cash flows.
- Ensure interest rates reflect reasonable risk premium based on borrower rating and security, avoiding usurious levels.
- Set and publicize a ceiling on total cost to borrower (interest plus charges) that aligns with bank's cost of funds and reasonable return.
- Confirm compliance to RBI within three months from the circular date (May 16, 2007) by submitting a confirmation to the respective Regional Office.
Who it affects
All State Co-operative Banks (StCBs), All District Central Co-operative Banks (DCCBs), Borrowers of small-value personal loans and similar advances
What does 'usurious interest' mean in this context?
RBI defines usurious interest as rates beyond a certain level that are seen as excessive, unsustainable, and not conforming to normal banking practice. Banks must avoid such rates on loans and advances.
Does this circular apply to all loans or only specific types?
It applies broadly to all loans and advances, but RBI specifically highlights small-value loans, particularly personal loans and similar products, for stricter internal guidelines.
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 16, 2007) and confirm compliance to their Regional Office.