Senior financial journalist
It’s a sad day for consumers in this country when courts have to intervene to get their legitimate dues from banks. The latest PIL filed in the Supreme Court by an NGO, the Moneylife Foundation, points out that when the repo rate is brought down, banks have delayed cutting interest rates for borrowers who opt for floating rates. The repo rate is the rate at when the Reserve Bank of India lends money to the banking system. The court, in turn, has directed the RBI to provide a response on this issue.
Those of us who have been concerned about judicial activism must take a pause as clearly in this instance, the executive has failed to protect the interests of the common man. The only recourse left is to seek redress from the court.
Floating rate dues not passed on
The issue, as highlighted by the petitioners, is that the benefit of reductions in the lending rate are not extended to those who have already taken loans for home-buying, education purposes or for purchase of consumer goods. The facility of the lower interest rate, instead, is given only to new borrowers. Banks are clearly using the lowered interest rates as a lure for new customers but have no inclination to provide the same to existing customers who have taken loans.
At the same time, the whole concept of "floating interest rates" means that these can and will be revised upwards or downwards, depending on the change in the repo rate. And those opting for this system have taken a calculated risk as rates can well go up, exposing them to higher rates. But when the gamble goes in their favour, they should be given their due returns.
The RBI itself has been concerned enough over this issue to have set up a committee last year to improve transparency in lending rates. It had earlier introduced the Marginal Cost of Funds-Based Lending Rates (MCLR) in 2016, shifting away from the concept of a base rate as banks took a long time to reflect reductions in the repo rate in their interest rates. Under the MCLR system, banks were supposed to be under an obligation to change their interest rates as soon as a repo rate was changed.
However, this did not happen, prompting the central bank to set up the committee which gave its recommendations earlier this year. It confirmed that cuts in repo policy rates were not being passed through to customers immediately. The transmission was far more rapid in the case of new borrowers but very slow for the existing borrowers under the floating rate system.
Even after receiving the report, however, the central bank took no firm action against banks which do not pass on reductions in the repo rate to existing customers. It was left to consumers to approach the apex court to deal with this blatant discrimination in passing on interest rate cuts. Now, faced with possible action by the apex court, the RBI has finally given an assurance that it is prepared to give instructions to banks to lower their interest rates when the repo rate is brought down. It should also give a concrete response about what it has done to ensure that consumers' interests are not being bypassed in all areas.
In addition, the central bank is faced with the proposal for setting up a fund to collect the excess interest charged to existing borrowers under the floating rate regime. The fund, it has been suggested, should be used to refund the overcharged amount by crediting the accounts of the borrowers through a centralised scheme to be framed by the RBI. It is only fair and correct for banks to pass on the excess profits gained by such slow transmission of interest rates.
Rising rates not passed on
It must also be recalled that studies have shown that when interest rates have risen, banks have been equally slow to pass on the benefit of this increase to holders of fixed deposits. The hike in rates has been rapidly passed on to borrowers but the benefit to fixed deposit holders has been tardy. This especially impacts those who survive on incomes from savings kept in banks which are still considered the safest bet for parking funds in the long run. Pensioners and elderly persons are among those who look forward to any increases in fixed deposit rates. In such a scenario, it is strange that banks are not prepared to give their due to consumers.
In other words, banks have been profiteering as far as interest rates are concerned. The entire objective of nationalising banks in the 1970s was meant to ensure that consumers' interests were paramount as well as to ensure that lending was directed to priority sectors of the economy.
On the contrary, consumers are now being short-changed by banks, with the excuse that revenues are needed to maintain operations. One such issue is that of unreasonable charges for not maintaining a minimum balance in accounts. This also needs to be taken up given the fact that banks earned Rs 5,000 crore last year just from this fee. The urgent need for higher revenues indicates that banks are trying to make up losses from NPAs by mopping up funds from ordinary customers.
The banking regulator has so far not taken any major initiatives to support the common man. It is high time for the RBI to step in and ensure that banks adopt rational policies to benefit all categories of customers. Unless it does so in the coming days, it seems clear that one can only look forward to a court diktat to ensure that consumers are given justice by the banking system.
- Banks are using the lowered interest rates as a lure for new customers but have no inclination to provide it to existing customers who have taken loans.
- When interest rates have risen, banks have been equally slow to pass on the benefit of this increase to holders of fixed deposits.
- Consumers are being short-changed over revenues needed to maintain operations. One issue is that of unreasonable charges for not maintaining a minimum balance in accounts.