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SC Seeks RBI Reply On Plea That Says Banks Not Passing Benefits Of Low Rates

SC Seeks RBI Reply On Plea That Says Banks Not Passing Benefits Of Low Rates

SC Seeks RBI Reply On Plea That Says Banks Not Passing Benefits Of Low Rates
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The Supreme Court (SC) on October 7 asked the Reserve Bank of India (RBI) to respond to a petition within six weeks that says banks and financial institutions are not passing on the benefits of changes in monetary policy.

The public interest litigation has challenged the manner of implementation of the Reserve Bank of India (Interest Rate on Advances) Master Directions, 2016, by banking companies. The petition, filed by non-government organisation Money Life Foundation, urged the banking regulator to intervene and take action against the “unfair practices” used by financial institutions. The petitioners also said the RBI had enough powers under various laws — the RBI Act, 1943, and the Banking Regulations Act, 1949 — to make banks comply with its directives.

Incidentally, the banking regulator and the Centre from time to time have been prodding financial institutions to lower interest rates when the RBI reduces interest rate, without much success.

While banks swiftly raise the interest rates the moment the repo rate is raised, says the petition, the very same banks drag their feet when the rate is brought down.

The RBI undertakes bi-monthly monetary policy review and sets the repo rate, the rate at which it lends money to banks, setting the tone for the interest rate regime which impacts, among others, EMI for home and auto loans. Currently, repo rate stands at 6.50 per cent.

Also read: Why Rate Cuts By RBI Benefit You Too Little, Too Late

The petitioners also pointed out the discriminatory approach adopted by banks in passing on the benefits — even if banks go for lowering the rate in accordance with the rate set by the RBI, only new borrowers are offered that benefit.

"Whenever the interest rate goes down, the new borrowers are offered a lower interest rate with respect to similar small loans in the fields of housing, education and consumer goods ...There is minimal or often no reduction in interest rates of old borrowers. This is gross discrimination in as much as it is in the teeth of equal protection of law enshrined under Article 14 (Right to Equality) of the Constitution. This is unfair and discriminatory, as has been remarked by the RBI’s own study group," the petition said.

The petitioners want the RBI to direct banks and housing finance companies to calculate the additional monetary burden existing borrowers had to bear because banks decided not to pass on the benefit. According to the petition, denial of every one percentage point of benefit results in retail borrowers losing Rs 15,000-20,000 crore. They also suggested this “overcharged” money be collected and put in a central corpus to refund borrowers.

In case the petitioners are not satisfied with the response of the banking regulator, they have the option to approach the SC.  

With inputs from Housing.com

Last Updated: Wed Oct 10 2018

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