RBI asks banks to end discrimination in loan pricing

The Reserve Bank of India (RBI) has asked banks to stop differential pricing of loans for different customers without any clear and valid reasons.

In its annual monetary and credit policy review on Monday, RBI said it had observed wide variations in the rates of interest banks charge on auto and home loans for different customers even when sanctioned on the same day.

As per the terms of RBI's extant instructions, all categories of loans (with certain specified exemptions) are to be linked to the Base Rate from July 2010.

''It is expected that the final rate of interest charged to the borrower will include product and customer specific charges and will be reasonable and transparent. However, the very wide variation in rates of interest charged by banks on retail loans to different borrowers on the same day cannot possibly be attributed to customers' risk profiles. Such a practice may be reflective of opaqueness in the system,'' RBI said.

RBI said that variation in pricing for services makes no sense when all of them are connected by a common network.

RBI has asked banks to take remedial action. Lenders should have management oversight on such practices and should also frame policies to ensure that retail loan pricing is "transparent, realistic, and related to the risk perception of the borrowers," it said.

RBI governor D Subbarao also asked the Indian Banks Association (IBA) to work out a plan to implement the M Damodaran committee recommendations for improving customer service in banks.

The Damodaran panel had, among other things, recommended benchmarking of service charges for basic banking services, zero liability for ATM/point-of-sale/internet banking transactions and doing away with differential interest rates for new and old customers.

The Damodaran committee, in its report submitted in August 2011, had made as many as 101 recommendations to improve customer service at banks, many of them have already been implemented.

The set of customer-friendly measures also include a promise to expand non-bank ATMs in rural and semi-urban areas.

However, the RBI has advised banks to limit lending against gold. Banks are allowed to lend against gold although they are barred from lending for gold purchases.

RBI has now restricted the facility of advances against the security of gold coins per customer to gold coins weighing up to 50 gms.

RBI said credit management in a bank is essentially an internal management function and banks are expected to prepare a well-defined loan policy approved by their boards, laying down, inter alia, the factors taken into consideration for deciding interest rates.

However, keeping in view the findings in this regard, banks are advised to have management oversight on such practices and also frame policies that ensure pricing of loans, especially retail loans, is transparent, realistic, and related to the risk perception of the borrowers, RBI said, adding that it would issue detailed guidelines by end-May 2013.