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Banks Cannot Arbitrarily Charge High Varying Interest Rates Without Proper Justification

In Manmeet Singh v UOI, [2024: AHC:8624-DB], decided on Jan 18, 2024, the Allahabad High Court held that banks cannot arbitrarily charge high varying interest rates without proper justification of the same and due intimation to and consent of the borrower.

The petitioner had taken a loan from Standard Chartered Bank for Rs. 9,00,000 at an annual interest rate of 12.5% but with a variable/floating interest rate. After repayment the petitioner was given a “no dues certificate” and his security documents were also returned to him. However, after checking his bank statement the petitioner noticed that the bank had deducted a sum of Rs.27,00,000 which was higher than the deduction which should have been made by charging a 12.5% interest rate on the principal amount. The petitioner raised a complaint regarding this deduction with the bank, however, he was only provided with a day-wise calculation justifying the deducted amount as response. The aggrieved petitioner approached the Banking Ombudsman of the Reserve Bank of India (RBI), under Clause 8(1)(x) read with Clause 8(2)(a) of the Banking Ombudsman Scheme, 2006 (hereinafter referred to as “the Scheme, 2006”). The petitioner stated before the Banking Ombudsman that not only were the rates arbitrarily and illegally revised charging exorbitant amounts every year but arrears on late payments amounting were also charged despite all payments being made on time. On 17 June, 2020, the petitioner was informed by the Ombudsman that the complaint was closed under Clause 11(3)(c) of the Scheme, 2006 however the petitioner was not given a chance to represent his case because he was not served with a copy of the Bank’s reply to the complaint raised in order to raise objections within time. Aggrieved by the same, the petitioner has approached the court via the present case.

The petitioner contended that according to Clause 11(2) and 11(3) of the Scheme, 2006 the petitioner should have been given an opportunity to be heard and should have been duly informed of the bank’s reply, the Ombudsman did not follow the procedure mentioned under both these sections and hence, violated the rights of the petitioner. The petitioner also contended that the bank charged an interest rate between 16-18%, which was much higher than the agreed 12.5% and that this was against the Master Circular of the RBI issued on 2 July, 2007 (hereinafter referred to as “Master Circular, 2007). The petitioner pointed out that according to the Master Circular, 2007, while banks could charge floating rates of interest on loans based on the market rates, it should be transparent and mutually accepted by both parties and that loan rates could be revised only after seeking consent of the borrower. This was not adhered to by the respondent bank according to the petitioner’s case. Further, the petitioner argued that the bank had unilaterally imposed maintenance charges on the home saver account, which was not agreed upon by the petitioner.

The respondent contended that the petitioner was aware that the rates were variable and that an intimation of the revised rates and the levy of the maintenance charges were given to the petitioner. The respondent stated that as per the RBI Master Direction, Interest Rate on Advances Directions, 2016, issued on 3 March, 2016 (hereinafter referred to as “Master Direction, 2016”), banks had greater freedom in fixing the floating charges and that Chapter III of the Master Direction, 2016 provided the guidelines for fixing Internal and External Benchmark based on which floating charges can be ascertained.

The court after considering the contentions of both parties stated that the respondent has not stated any valid reason as to why the interest rates fluctuated to such an overzealous value. The court noted that interest rates charged depend on a number of factors including the cost of fund, cost of operation, credit worthiness of the borrower, riskiness of loan portfolio, availability of collateral, market competition and profit expectations etc. and that in this instance risk in the loan portfolio, collateral provided and credit worthiness of the petitioner all remained static, in such a situation the fluctuation in the remaining factors could not have caused the interest rate to soar so high. The bank therefore concluded that the amount charged was indeed exorbitant. The court also recognized that upon seeking proof of delivery form the respondent for delivery of intimations, the respondent failed to deliver. There were no mentions of the revised rates or maintenance charges in the email communications between the petitioner and respondent as well. The court noted that although banks have freedom in ascertaining interest rates, according to Clause 2.12 of the Master Circular, 2007, the rates must be reasonable and must have an appropriate ceiling, which was clearly absent in the present case.

The court also noted by placing reference on the case of Central Bank of India vs. Ravindra, (2012) 1 SCC 367, that the banks fixing exorbitant interest rates has been a recurring issue and that while the RBI has issued guidelines, it has not taken measures to implement them. The Court also noted that the Ombudsman in the present case, who is tasked with dealing with grievances of the parties, has also violated the procedure laid down under the Scheme, 2006. Hence, the court directed the Ombudsman to re-assess the petitioner’s complaint by applying his independent mind and provide due redressal after giving the petitioner the opportunity to be heard.