Allahabad High Court Criticises RBI, Labels It 'Mute Spectator' On High Interest Rates

The Reserve Bank of India has been a mute spectator in allowing banks to charge exorbitantly high interest rates from customers, the Allahabad High Court recently observed.

A case involving a loan that one Manmeet Singh had taken was before the high court. Singh had availed of a loan to the tune of Rs 9 lakh from Standard Chartered Bank at an interest rate of 12.5%.

However, it was stipulated in the loan agreement that the interest rate was variable in nature.

After paying off his dues to the bank on time, Singh checked his loan account, which should have debited Rs 17 lakh as per the agreed-upon interest rate, but he was shocked to find out that the bank had charged Rs 27 lakh instead.

The bank contended that since the rate of interest was variable in nature, it charged an interest rate between 16% and 18% throughout the period of the loan.

It further contended that Singh had agreed to a floating rate of interest and that the RBI has allowed banks to charge interest based on market conditions.

The bank also claimed that it had been sending notices about the change in interest rate to Singh.

However, these notices were never received by him, and the address to which they were sent was also incorrect.

When Singh approached the banking ombudsman for relief, an order was passed against him without giving him a proper opportunity to present his case.

The court held that the bank had not given any rationale to charge such a high rate of interest from Singh.

The bank was trying to mask its arbitrary and illegal action by stating that Singh had agreed in the loan agreement to pay a floating rate of interest, it said.

It was further observed that the credit worthiness of the borrower, the riskiness of the loan portfolio, and the availability of collateral remained the same in this case, and therefore, such an exorbitant rate of interest was unfounded.

The court said that the bank failed to provide and adopt a transparent method of charging interest, and as per RBI guidelines, any change in that rate cannot be applied to customers without issuing a notice and without the customer’s consent.

Even if banks are given the benefit of doubt that they are free to charge interest rates as per market conditions, it is the duty of the RBI to see that customers are not inconvenienced by the huge rate of interest charged by the banks, the court observed.

As a result, the court sent the matter back to the ombudsman for a fresh decision.