No changes likely in personal loan rates

BS Reporter / Mumbai May 8, 2007

The directive by Reserve Bank of India (RBI) to put a ceiling on interest, including processing and other charges, on small value loans especially personal loans, is not expected to make any substantial impact on the rates charged on these loans.

Bankers are of the view that the charges fixed by them are not usurious, and they do not see any revision in charges. According to bankers, a 5-6% charge over the prime lending rate for personal loans is justifiable as risk premium for these non-collateralised loans.

"Retail business is an open market and banks are competing with each other. In a competitive environment, there is no space for usurious charges. The market determines the interest rate and charges. Interest rate is always ratified by the board,'' a senior private sector bank official said.

Some bankers are of the view that RBI and the government have been forcing banks for directing lending to agriculture, education and other priority areas. On the other hand, in a deregulated environment, banks are being asked to put a ceiling on the personal loans which help in recovering the lost margins.

"We may put up the issue before the Indian Banks’ Association since there has been a lot of pressure to push loans towards priority sector and small scale sector," a senior banker said.

Meanwhile, a section of bankers said this will put some pressure on the banks to clearly differentiate between interest charges and other service charges. "Banks will now be required to tell customers what the total outgo can be at the outset ... they will not be able to levy any hidden charges," a senior official of a large bank said.

Bank boards have been given three months to work out suitable principles and procedures to avoid charging high rates from customers.

Source:
http://www.business-standard.com/common/storypage_c_online.php?leftnm =11&bKeyFlag=IN&autono=23099