What changed
RBI reiterated that while lending rates are deregulated, charging excessively high interest is unsustainable and against banking norms. It issued detailed guidelines for UCBs to prevent usurious practices, including prior approval for small loans, risk-based pricing, and a ban on penal interest for priority sector loans up to Rs.25,000. Banks must also ensure total interest on short-term advances to small/marginal farmers does not exceed the principal.
What it means for you
UCBs must overhaul their loan pricing frameworks to avoid regulatory action. The circular signals RBI's intolerance for predatory lending, especially to vulnerable borrowers. Banks need to balance profitability with fair practices, or face reputational and compliance risks.
What you must do
- Review and revise board-approved lending rate policies within three months to eliminate usurious charges.
- Implement prior-approval processes for small-value and personal loans, considering borrower cash flows.
- Ensure total cost to borrower (interest + charges) is justifiable against bank's cost and reasonable return.
- Stop charging penal interest on priority sector loans up to Rs.25,000; cap interest on short-term advances to small/marginal farmers to not exceed principal.
- Publicise interest rate ceilings and display minimum/maximum rates at all branches.
Who it affects
All Primary (Urban) Co-operative Banks, Borrowers of small-value loans and personal loans, Small and marginal farmers (land holding ≤5 acres), Priority sector loan customers
What is considered 'usurious' interest under this circular?
RBI does not define a specific rate but says rates beyond a certain level that are unsustainable and not conforming to normal banking practice may be seen as usurious. Banks must set internal principles to avoid such charges.
Does this apply to all loans or only specific categories?
The circular focuses on small-value loans, personal loans, and similar loans. It also gives specific rules for priority sector loans up to Rs.25,000 and short-term advances to small/marginal farmers.
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 18, 2007).