RBI raps banks for charging more from retail clients

‘Opaque lending structure needs to be changed’.

The Reserve Bank of India (RBI) has rapped banks for continuing to charge unduly high interest rates from retail customers even after announcing a series of cuts in lending rates.

This came at a pre-monetary policy meeting with bankers after the latter sought retaining of the soft interest rate regime. “If after so much liquidity support, fiscal and monetary sops, the interest rates remain so high for retail customers, what is the meaning of the monetary policy if it is not translating into a low interest rate regime for retail customers?” went RBI’s comment.

Officials said even after announcing lending rate cuts, the rates being charged were still high. This has been reflected in the periodic data banks send to RBI. In some cases, the effective rates are as high as 30 per cent for some and as low as 3-4 per cent for others — the latter rate is usually for a short-term corporate loan for working capital.

“Whatever be the cost of deposits or however risky the profile of the customer, interest rates of 28-30 per cent are not desirable. When we speak to banks, the card rates range between 8 per cent and 15 per cent. These do not mean anything if the hidden rates were so high,” said the official.

Also, research by RBI into loan pricing of some banks has shown that they are deducting only the interest portion of loans in the first few years, keeping the principal intact. “Ideally, an equated monthly installment should be a combination of principal and interest. What kind of a deposit rate or a disproportionate deposit rate structure can justify such a loan pricing model?” asked the official.

RBI’s comments come in the backdrop of its recent draft report on the loan pricing mechanism of banks which suggested replacing the prime lending rate with a base rate.

Officials, however, said RBI was not dictating the interest rate structure to banks. “All we are interested in is transparent pricing of loans so that the retail customer knows what he is paying. Also, the effective rate should not vary so much. RBI should know what comprises the loan rate, irrespective of whatever business model the bank is following, because it is mandated to work out the monetary policy accordingly,” said the official.

Sources said while RBI might maintain a status quo on interest rates and on the cash reserve ratio, its main concern would be ensuring transparency in the effective interest rates charged by banks from their retail customers.