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It is a very common perception with borrowers of private banks like HDFC and ICICI that they are prompt in increasing their BPLR (Benchmark Prime Lending Rate) every-time RBI increases its Repo Rate but not so prompt in timing and magnitude when RBI decreases the interest rate, with the result effective spread for a particular borrower over say, RBI Repo rate keeps going up despite its being linked to BPLR. This hurts existing customers of the banks because new customers are always able to bargain for a competitive rate and these banks generally offer them discounts over BPLR.  To what extent, this practice subsides with RBI’s insistence on disallowing any loans below BPLR remains to be seen.

In their pursuit of making more money by constantly trying to charge borrowers under floating rate loans more, these banks such as HDFC Bank Ltd., have been violating the clear directives of RBI. Little do the borrowers know that under the existing regulations, these banks are not allowed to link their floating rate loan products to their internal Benchmark Prime Lending Rate  and also, they stipulate that every agreement must have an enabling clause to the effect that interest rates will be increased or increased in accordance with increase or decrease in interest rates by RBI from time to time. The borrowers can seek to complain to the Banking Ombudsman or approach Debt Recovery Tribunal against the erring banks to ensure that they are not charges more under the guise of bank’s internal BPLR rate revisions which they control entirely.
 
RBI’s master-circulars  on Interest Rates on Advances (for instance, No. DBOD.No.Dir.BC.14/ 13.03.00/2008-09 dated July 1, 2008) stipulates under clause 2.5  Floating Rate of Interest on Loans:
 
2.5.1. Banks have the freedom to offer all categories of loans on fixed or floating rates, subject to conformity to their Asset-Liability Management (ALM) guidelines. In order to ensure transparency, banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products. The methodology of computing the floating rates should be objective, transparent and mutually acceptable to counter parties. Banks should not offer floating rate loans linked to their own internal benchmarks or any other derived rate based on the underlying. This methodology should be adopted for all new loans. In the case of existing loans of longer / fixed tenure, banks should reset the floating rates according to the above method at the time of review or renewal of loan accounts, after obtaining the consent of the concerned borrower/s.
 
Thus, it is not allowed to the banks to prepare loan agreements providing for floating rate of interest applicable to loan as certain premium/discount over their internal BPLR. In practices, banks do exactly that, and a borrower never knows that the bank is violating express directive of the RBI with a view to delink the effective rate with an external or independent rate of interest such as RBI’s repo rate or otherwise.

Further, under clause 2.7.  Enabling clause in loan agreement  it states that :
 
2.7.1. Banks should invariably incorporate the following proviso in the loan agreements in the case of all advances, including term loans, thereby enabling banks to charge the applicable interest rate in conformity with the directives issued by RBI from time to time.

"Provided that the interest payable by the borrower shall be subject to the changes in interest rates made by the Reserve Bank from time to time."
 
2.7.2. Since banks are bound by the Reserve Bank's directives on interest rates on loans and advances, which are issued under Sections 21 and 35A of the Banking Regulation Act, 1949, banks are obliged to give effect to any revision of interest rates whether upwards or downwards, on all the existing advances from the date that the directives / revised interest rate (change in BPLR and Spread) come into force, unless the directives specifically provide otherwise.

These banks do not comply with this condition as well, and do not incorporate such an enabling clause in their loan agreement, with the result the borrower does not even know that he has an enforceable right to maintain the negotiated spread over some independent interest rate, such as RBI’s repo rate.

While most borrowers know that they are being short changed by these banks, but they often do not know how to protect themselves. Armed with the above information, they can compel their banks to revise the effective rate of interest charged to their floating rate loan products, and if they do not heed to such requests, they can approach the Banking Ombudsman or DRT. Surely, the above directives of RBI are binding on the banks and the above authorities cannot decide in favour of the banks.




Category Others, Other Articles by - CA Anil Garg 



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