The Hindu Business Line : RBI tells banks to keep loan rates reasonable

Note of caution
Banks have to go by several guidelines on small value loans
Interest charged should incorporate risk premium as considered reasonable to internal rating of borrower

Mumbai May 7 Short of capping interest rates, the Reserve Bank of India has given banks three months time to be reasonable while pricing loans. In a strongly worded circular, the RBI has said, "It will be appreciated that though interest rates have been deregulated, rates of interest beyond a certain level may be seen to be usurious and can neither be sustainable nor be conforming to normal banking practice".

Bank boards have been advised to lay down "appropriate internal principles and procedures so that usurious interest, including processing and other charges, are not levied by them on loans and advances."

The central bank has said banks need to go by several guidelines on small value loans, particularly, personal loans and such other loans of similar nature.

It has said, "An appropriate ceiling may be fixed on the interest, including processing and other charges that could be levied on such loans, which may be suitably publicised."

The RBI has flashed the red card and market players expect the public sector banks to behave.

There is a possibility of deposit rates being pruned to protect margins and the balance sheets.

"Interest rates across sectors have been hiked by all, though the public sector banks charge lower rates of interest than private banks. For instance, the difference between the prime lending rate of SBI and the benchmark advance rate of ICICI Bank is around 3 percentage points. This is a disciplinary signal to private as well as public sector banks," said a senior bank official.

The RBI has said that the interest charged by banks should incorporate risk premium as considered reasonable and justified having regard to the internal rating of the borrower.

"Further, in considering the question of risk, the presence or absence of security and the value thereof should be taken into account. 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," said the RBI.

Some analysts feel bank stocks may dip in trading tomorrow. According to Ms Sarika P. Lohra, banking analyst, Angel Broking, "there may be a higher impact on public sector banks as the Government has majority holding in them and are more regulated. Banks may respond to these guidelines by simultaneously reducing their deposit rates to avoid the impact."

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