RBI panel to look into predatory lending

The Reserve Bank of India (RBI) has set up an internal committee to frame guidelines on predatory lending and is exploring the possibility of extending the Usurious Lending Act to banks.

The move comes at a time when four foreign banks – Standard Chartered, Hongkong and Shanghai Banking Corporation (HSBC), American Express and Citibank – have moved the Supreme Court with a special leave petition (SPL) and the hearing for admission of SPL is on September 8. The committee is, however, expected to wait till the Supreme Court decides on the issue before finalising its recommendations.

At present, the Usurious Lending Act is applicable to the unorganised sector, including moneylenders and others. In what may have a widespread impact, sources close to the development said there could be a legislation on consumer credit, as is the case in developed countries, which could override all other regulations and directions.

Predatory lending refers to financing of low-income homeowners or other groups of individuals who are financially vulnerable. Usurious refers to excessive rates of interest.

The SLP was filed challenging the order of the National Consumer Disputes Redressal Commission (NCDRC), which concluded that charging of interest at rates in excess of 30 per cent for failure of the credit cardholder to make full payment on the due date is an “unfair trade practice”.

It further said penal interest can be charged only once for one period of default and shall not be capitalised and charging of interest with monthly rests is also unfair trade practice. Many banks add up charges for one period of default with prior periods when a cardholder was paying dues on time.

The July 2008 order was in response to a consumer complaint. Meanwhile, the Indian Banks’ Association proposes to intervene in the matter by filing an intervention application on the ground that section 21(A) of the Banking Regulation Act specifies that rates of interest charged by banking companies are not subject of scrutiny by courts and hence no transaction can be opened on the basis of excessive charges.

Sources close to the development said RBI has not been called yet, but it might be asked for its views since it is a party to the case filed in the Consumer Dispute Redressal Commission. If required, the Banking Regulation Act and the Payment and Settlement System Act would together empower RBI to regulate and check usurious or excessive rates.

However, in its views submitted to the commission, RBI had said functions exercised by it in relation to credit cards are only regulatory in nature and the consumer forum would be entitled to adjudicate on the interest rates charged by banks amounting to unfair trade practice under the Consumer Protection Act, 1986.