Loans but at what Price?

Now days the changes are occurring so fast, the way of thinking and living have changed. Every one is trying hard to keep themselves up to mark in this race. To help people banks/NBFCs are providing loans so that people can fulfill their wishes. But the lucrative offers in these loans make people end up in heavy debts.

At the time of giving loan banks check all the income related documents attached with the application. The banks do explain terms and conditions and the interest rates the loan carries with it. But these unsecured loans in many cases may be of a small ticket size, but, they carry high interest rates and also other charges in the event of default. In many cases, lending organizations are taking advantage of the unregulated interest rate regime and vulnerability of their customers and subjecting them to the torture of recovery agents.

Many times customers end up repaying the outstanding, which consists of little principal but high amounts of financial charges/fees and other charges. In select cases, interest rate can be as high as 48% per annum and in case of default and non-payment, when other fees with service tax are added, this can easily cross more than 100% per annum. In case the borrower wants to pre-pay the loan, there is a pre-payment charge. So a situation is created through a loan agreement or card holder agreement, the ramification of which is never explained to the borrower by the DSA/DMA.

There had been a case in which the Supreme Court of India in criminal appeal No 267 of 2007 on February 26, a case involving a leading bank has come out with a lot of important observations. One point made is that — for the lender — it is not a mere question of lending the money that matters, but also the consequence thereafter. Thus, there is an element of social responsibility. Secondly, recovery of loans or seizure of vehicles can be done only through legal means. Thirdly, strictures ought to be imposed on erring banks to curb their high-handed activities and make them answerable to the general public. Finally, the apex court has said that banking procedures should be people-friendly and at the same time, strict in its enforcement and educative enough to guide the public of the benefits of prudent banking and the lender should be transparent in their transactions with the borrowers.

The provisions of The Usurious Loans Act 1918 read with The Punjab Relief of Indebtedness Act, 1934 indicates that any rate above 12.5% simple rate of interest per annum on unsecured loans can be considered as ‘usurious’ by the competent court.

Against the above back drop, the Reserve Bank of India in it’s Annual Policy Statement for 2007-08 made a mention of the complaints received by it and Banking Ombudsman offices and stated that in a deregulated interest rate regime, rates of interest beyond a certain level may be seen to be usurious and can neither be sustainable nor in conformity with banking prudence. Therefore, the banks are advised to lay down internal principles and procedures so that such usurious interest including processing and other charges are
not charged.

This was followed by a directive through a circular dated May 7 to all commercial banks inter alia stating that the total cost to the borrower, including interest and all other charges levied on a loan, should be justifiable having regard to the total cost incurred by the bank in extending the loan, which is sought to be defrayed and the extent of return that could be reasonably expected from the transaction. Besides they are required to put an appropriate ceiling on interest and other charges and suitably publicize it.

The banks are required to implement this circular by September 7. Similar directions have been issued to Regional Rural Banks (RRBs), urban banks and NBFCs and RNBCs by RBI. However, in case of NBFCs/RNBCs, RBI has advised that excessive interest rate can neither be sustainable nor be conforming to normal financial practice. Therefore, the board should lay down internal principles and procedures in determining the interest rate and processing and other charges.

The step taken by RBI is in the interest of the society and the banks/NBFCs. It is mandatory for the banks/NBFCs to implement the same. At the same time there is need to keep check whether all these institutions will voluntarily reduce the interest rates and other charges adequately in a fair and just manner keeping in mind the corporate social responsibility, as a good corporate citizen, as no ceiling has been prescribed by RBI.

There are certain regulatory measures which NBFCs and RNBCs have to take in consideration. NBFCs and RNBCs beyond a cut-off asset size may be asked to publish their balance sheets and profit and loss accounts in newspapers and put it in their websites so that the public at large become aware about the profit generated in their business. Also it may be considered to put in place a non-discretionary penalty on banks/NBFCs by prescribing the amount for any violation noticed and established in a transparent manner.

For credit cards, the banks may be advised to open service points/contact points where a card holder can walk in to obtain a duplicate bill, make payment towards his bill, surrender the card or report loss of card against proper receipt which will mitigate most of the after sales problems faced by the card holders.

The regulator is doing its duty now it is the borrower who has to show his understanding. The banks and NBFCs are commercial organizations; the borrower should borrow sensibly to avoid a debt trap.