DBOD

 Complaints about excessive interest charged by banks

Circular No. DBOD No. Dir.BC.93/ 13.03.00/2006-07 Dated 07.05.2007: The Reserve
Bank vide the above circular notifies that the Reserve Bank and Banking
Ombudsmans' offices have been receiving several complaints regarding levying of
excessive interest and charges on certain loans and advances. Accordingly, a
reference is invited to Reserve Bank's Master Circular DBOD. Dir.BC.5/ 13.03.00/
2006-07 dated July 1, 2006 advising banks to have an objective and transparent
policy approved by their Boards for the purpose of fixing interest rates on loans and
advances. In the case of short-term advances granted to small and marginal farmers,
Reserve Bank has also advised banks to ensure that interest applied does not exceed
principal amount. Further, though interest rates have been deregulated, rates of
interest beyond a certain level may be seen to be usurious and can neither be
sustainable nor be conforming to normal banking practice. Boards of banks are,
therefore, advised to lay out appropriate internal principles and procedures so that
usurious interest, including processing and other charges, are not levied by them on
loans and advances. In laying down such principles and procedures in respect of
small value loans, particularly, personal loans and such other loans of similar nature,
banks may take into account, certain broad guidelines like: An appropriate prior-
approval process should be prescribed for sanctioning such loans, which should take
into account, among others, the cash flows of the prospective borrower; Interest
rates charged by banks should incorporate risk premium as considered reasonable
and justified having regard to the internal rating of the borrower. The total cost to the
borrower, including interest and all other charges levied on a loan, should be
justifiable having regard to the total cost incurred by the bank in extending the loan
and an appropriate ceiling may be fixed on the interest, including processing and
other charges that could be levied on such loans, which may be suitably publicised.

 RBI direction for not allowing listed defaulted companies to deal with the money
transaction in their accounts in pursuance of the Patna High Court advise

Circular No. DBOD. No. Dir. BC. 91 /13.26.00/2006-07 Dated 30.04.2007: The Hon'ble
Patna High Court vide its order dated April 10, 2007 has directed the Reserve Bank of
India to direct all the banks that the companies which have been declared as
'defaulted companies' be not allowed to deal with the money transaction in their
accounts. Therefore vide present circular, RBI advises all the banks to ensure that no
money transaction of the companies, declared as 'defaulted companies' by the
Hon'ble Patna High Court be allowed in bank or their respective branch offices.

 Reduction in Risk Weight on residential housing loans

Circular No. DBOD.BP.BC. 92 /21.01.002/ 2006-07 Dated 03.05.2007: As per terms of

circular No.DBOD.BP.BC.61/21.01.002/2004-05 dated December 23, 2004, risk
weights on housing loans extended by banks to individuals against mortgage of
housing properties and investments in Mortgage backed Securities (MBS) of Housing
Finance Companies (HFCs), recognised and supervised by NHB were increased to
75% for capital adequacy purposes. Accordingly, banks have been advised from time
to time to tighten their credit administration in this area in particular and RBI in terms
of present circular advises that it has been decided to reduce the risk weight in
respect of housing loans up to Rs. 20 lakh to individuals against the mortgage of
residential housing properties from 75% to 50%. Similarly, the risk weight for banks’
investment in mortgage backed securities, which are backed by housing loans which
would now qualify for 50% risk weight, and are issued by the housing finance
companies regulated by the National Housing Bank is also reduced from 75% to 50%.