RBI allowing banks to arbitrarily charge very high rate of interest: Allahabad High Court

The Allahabad High Court recently observed that despite guidelines issued by the Reserve Bank of India (RBI), banks are permitted to impose arbitrarily high interest rates on their customers. [Manmeet Singh v. UOI & Ors].A Bench of Justices Mahesh Chandra Tripathi and Prashant Kumar observed,“Surprisingly, RBI had been issuing guidelines but has done nothing for the implementation of the same. They have just been a mute spectator allowing the banks to charge arbitrarily a very high rate of interest.”.Further discussing RBI's responsibility as the banking regulator in the country, the Court said,"Even if the benefit of doubt is given to the bank that they are free to charge the interest rate but it is duty of the RBI to see that the customers are not inconvenienced by huge rate of interest charged by the banks.".The petitioner before the High Court had obtained a ₹9 lakh loan from Standard Chartered Bank with a variable interest rate of 12.5% per annum.After repaying the entire amount, the petitioner requested a 'no dues certificate' and property document release from the bank, which were promptly provided.Upon closing the loan account, the petitioner discovered an unauthorized debit of ₹27,00,000. At 12.5% interest per annum, the amount to be paid was a little over ₹17 lakh. Thereby, he filed a complaint with Standard Chartered Bank..Subsequently, the petitioner sought 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 (BOS-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 under Clause 11(3)(c) of BOS-2006, citing settlement by the bank..During the hearing before the High Court, counsel for the petitioner argued that the banking ombudsman had closed the complaint without giving any opportunity to the petitioner to present his case.It was additionally argued that the petitioner's Right to Information (RTI) request unveiled that he did not get an opportunity to submit objections.Further, it was contended that interest for the loan was charged at the rate of 16-18%, as opposed to the 12.5% the petitioner had agreed to pay..On the other hand, counsel for the Bank argued that the agreement explicitly outlined a variable interest rate, subject to revision every three months.Counsel for RBI argued that it had regulated the interest rates charged by banks, and that the rate of interest on loans depend on various external factors. .The Court noted that the petitioner was consistently charged a higher interest rate throughout the loan tenure without any apparent justification.“The bank is trying to mask their arbitrary and illegal action by stating that the petitioner has agreed in the loan agreement to pay floating rate of interest and RBI has allowed the bank to charge interest based on the market conditions,” the order said..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 master circular dated July 2, 2007.The Court further ruled that the petitioner was not informed about and, consequently, did not accept the variable interest rate charged by the bank.“The respondent no.5-bank failed to provide and adopt a transparent method of charging of the interest. It has been pointed out that the respondent-bank 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 notice to him and without his consent," the order stated..The Court determined that the banking ombudsman failed significantly in adjudicating the petitioner's case. The petitioner was not afforded any chance to respond to the objections raised by Standard Chartered Bank, it added.Thus, the Court quashed the order and sent the issue back to the banking ombudsman to decide afresh..Advocate Utkarsh Srivastava represented the petitionerSenior Advocates Anurag Khanna and Advocate Sumit Kakkar appeared for RBI.Advocate Himadari Batra appeared for Standard Chartered Bank..[Read Order]