SC asks RBI to examine if the benefits of interest rate cuts reach customers
NEWDELHI: The Supreme Court on Monday asked the Reserve Bank of India (RBI) to examine within six weeks whether the benefits of cuts in interest rates are being passed on to customers.
The central bank told a bench headed by Chief Justice Ranjan Gogoi that it was willing to instruct banks to lower their interest rates when the repo rate was slashed.
The repo rate is the rate at which RBI lends money to commercial banks.
The apex court order came during a hearing on a petition by a non-governmental organization (NGO), Moneylife Foundation, seeking the court to direct banking firms and non-banking financial companies (NBFCS) to calculate the amount in excess interest they have charged borrowers under the floating rate regime by denying them the benefit of lower rates.
The NGO also wanted these companies to publish on their websites every week the methodology by which they set the rate of interest.
The petition cited a central bank report that found banks were not passing the benefits of lower interest rates to customers.
The NGO contended that the manner in which individual banks and NBFCS implement interest rate directives is “arbitrary and discriminatory”, and in violation of the fundamental rights guaranteed under Articles 14 (right to equality) and 21 (right to life) of the Constitution.
The plea alleged that by failing to take action on the petitioner’s repeated requests for justice on behalf of citizens, RBI had deliberately acquiesced in the discrimination by banks in the name of implementing the marginal cost of funds-based lending rate (MCLR) regime.
From time to time, RBI has expressed concerns about the reluctance of banks to pass on rate cuts to consumers, and made several attempts to change the way they price their loans. In 2003, RBI introduced the benchmark prime lending rate (BPLR), but this failed to bring in transparency, as a large part of the lending took place at interest rates below the announced BPLRS. Then came the base rate, which was to be the minimum rate for all loans and calculated on the basis of cost of funds. Individual borrowers were charged a spread over the base rate, which was tweaked to benefit only new borrowers.
The drawbacks of these lending rates led RBI to introduce MCLR in April 2016. However, in the absence of a sunset clause on the base rate, banks were slow to migrate their customers to the MCLR regime.
In October 2017, a committee under the central bank recommended linking bank lending rates to a market benchmark like T-bills, certificate of deposit or repo rate.
(Gopika Gopakumar in Mumbai contributed to this story.)