RBI ticks off banks for rate reset violations

The Reserve Bank of India (RBI) has come down heavily on some banks which are violating agreements with borrowers while increasing interest rates.

RBI has observed that some banks raise interest rates, particularly on term loans, every time the benchmark prime lending rate (BPLR) is changed. This is despite the loan contract clearly mentioning that banks can increase rates only after a gap of a certain number of years. This is known as the reset clause in bank parlance.

In case of term loans, the common practice is to prescribe a specific reset period, which can be two years, three years or five years. This ensures that a particular rate, once fixed, is maintained for a particular period. Benchmark lending rates, both BPLR and base rate, can change anytime depending on the interest rate environment.

Addressing a complaint from a company last week, the Appellate Authority of RBI rejected a public sector bank’s appeal and upheld the order passed by the banking ombudsman. The appellate authority had asked the bank to retain the rates fixed prior to the reset period.

RBI has also ordered a scrutiny of all term loan accounts of the bank as it feels that some borrowers may be ‘suffering in silence’.

Asking the Kolkata-based bank to rectify the rate, RBI said in a letter that the appellate authority had directed the bank to review the rate urgently and confirm that the rate was not changed during each reset period in cases of term loans sanctioned since April 1, 2006.

“In cases where a discrepancy is observed, the same should be rectified immediately and the excess amount refunded to the borrower,” RBI said.