Allahabad High Court Raps RBI For Allowing Banks To Arbitrarily Charge Borrowers High-Interest Rate

Allahabad High Court Raps RBI For Allowing Banks To Arbitrarily Charge Borrowers High-Interest Rate

States that it was the duty of the banking regulator to see that the customers were not inconvenienced after taking loans

The Allahabad High Court has observed that despite the guidelines issued by the Reserve Bank of India (RBI), banks are being permitted to impose arbitrarily high-interest rates on their customers.

In the Manmeet Singh vs. UOI & Ors case, the bench comprising Justice Mahesh Chandra Tripathi and Justice Prashant Kumar held, “Surprisingly, the RBI had been issuing guidelines but has done nothing for its implementation. It has been a mute spectator by allowing the banks to charge a very high rate of interest.”

While discussing RBI’s responsibility as the banking regulator, the court stated, “Even if the benefit of the doubt is given to the bank that they are free to charge the interest rate, it is the duty of the RBI to see that the customers are not inconvenienced by the huge rate of interest charged by the banks.”

The petitioner had obtained a Rs.9 lakh loan from Standard Chartered Bank with a variable interest rate of 12.5 percent per annum.

On repaying the entire amount, he requested a ‘no dues certificate’ and property document release from the bank, which were provided promptly.

However, upon closing the loan account, the petitioner discovered an unauthorized debit of Rs.27 lakh. At 12.5 percent annual interest, the amount to be paid was slightly over Rs.17 lakh. Thereby, he filed a complaint with the bank.

He later sought a resolution from the banking ombudsman of the RBI, invoking Clause 8(1)(x) in conjunction with Clause 8(2)(a) of the Banking Ombudsman Scheme, 2006.

However, the petitioner’s complaint was closed without providing him a copy of the bank’s reply.

The ombudsman indicated that the petitioner did not submit any objections within the stipulated timeframe. Consequently, the complaint was closed, citing a settlement by the bank.

The counsel for the petitioner argued before the high court that the banking ombudsman closed the complaint without providing an opportunity to the petitioner to present his case. The petitioner’s Right to Information (RTI) request also unveiled that he did not get an opportunity to submit the objections.

The counsel added that the interest for the loan was charged at the rate of 16-18 percent, as opposed to the 12.5 percent, which the petitioner had agreed upon.

On the other hand, the counsel for the bank submitted that the agreement explicitly outlined a variable interest rate, subject to revision every three months.

Meanwhile, the RBI’s counsel argued that it had already regulated the interest rates charged by the banks and that the rate of interest on loans depended on various external factors.

The judges noted that the petitioner was consistently charged a higher interest rate throughout the loan tenure without any apparent justification.

The bench stated, “The bank is trying to mask its arbitrary and illegal action by stating that the petitioner agreed in the loan agreement to pay the floating rate of interest and the RBI allowed the bank to charge interest based on the market conditions.”

It observed that Standard Chartered Bank sent notices to an incorrect address, and despite claims of emails notifying the petitioner about the interest rate change, insufficient evidence was presented in court. It determined that the bank’s imposition of a higher interest rate violated the RBI’s July 2, 2007, master circular.

The court ruled that the petitioner was not informed and did not accept the variable interest rate charged by the bank.

Justice Tripathi and Justice Kumar remarked, “The respondent No.5-bank failed to provide and adopt a transparent method of charging the interest. It did resort to an arbitrary methodology. As per the guidelines given by the RBI, any change in that rate cannot be applied to the customers without notifying them and without their consent.”

The bench ruled that the banking ombudsman failed significantly in adjudicating the petitioner’s case. He was not given the chance to respond to the objections raised by the bank.

Thus, the court quashed the order and sent the matter back to the banking ombudsman to decide it afresh.

Advocate Utkarsh Srivastava represented the petitioner.

Senior advocates Anurag Khanna and Sumit Kakkar appeared for the RBI.

Advocate Himadari Batra appeared for the Standard Chartered Bank.