Banking News

Banks cannot indiscriminately charge interest on advances of same category

Hereafter banks cannot differentiate old and new borrowal accounts for the purpose of selectively charging different rate of interest within the same category borrowers. The new guidelines of RBI on ‘Interest Rates on Advances’ will  comes into effect immediately one month after its Circular dated 19.01.2015.

Hitherto banks used to selectively lower rate of interest to new customers, primarily for home loans, by changing the spread (the difference between base rate and the rate charged to the customer). Under the new scheme of calculation of loan pricing banks are required to bring down their base rate in response to the cut in repo rate by RBI. Further RBI directed the banks to ensure that the spread charged to an existing borrower is not increased except in case of risk profile of the borrower has worsened or tenure of the loan is extended.  Moreover, now banks cannot change spread over the base rate indiscriminately. The decision of increasing the spread on account of credit risk profile should be supported by full-fledged risk profile review of the borrower. The change in tenor premium should not be borrower specific. These additional guidelines of central bank on interest rate will force commercial banks to pass on repo-rate cut benefit to the borrowers. The spread norms specified by RBI on interest rate on advances are not applicable for consortium advances. Banks are allowed to revise the spread only for maintaining uniform rate in line with other lenders of consortium advances.

(Source: RBI circular dated 19.01.2015)

Related article: How banks determine ‘base rate’ and ‘spread’ in respect of interest on advances

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