RBI Mute Spectator, Allowing Banks To Arbitrarily Charge Very High Rate Of Interest Despite Guidelines: Allahabad High Court

The Allahabad High Court has expressed surprise on how despite guidelines issued by the Reserve Bank of India, banks are being allowed to charge higher rates of interest from their customers.

While dealing with a case regarding higher interest rate charged by Standard Chartered Bank without informing the petitioner, the bench comprising Justice Mahesh Chandra Tripathi and Justice 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, it was observed that,

“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 Court observed that the Standard Chartered Bank had not adopted a transparent method of charging of the interest and changed the same arbitrarily. It was observed that no change of rate of interest could be applied without informing the borrower and obtaining his consent.

Factual Background

Petitioner took a loan of Rs. 9 lakh from Standard Chartered Bank in 2006 under “Loan Against Property-Home Saver” at an interest of 12.5% per annum with repayment to be made in 144 monthly instalments of ₹12095/-. The rate of interest was variable. After paying off the entire claimed amount, petitioner approached Standard Chartered Bank for No Dues Certificate and release of documents of the property. The same were duly given to the petitioner.

However, after closure of the loan account, petitioner found that the bank had illegally debited Rs. 27,00,000/- against the sanctioned loan of Rs. 9,00,000/-. On complaint being filed by the petitioner with the Standard Chartered Bank, a day-wise calculation sheet was provided to the petitioner. Subsequently, petitioner approached the Banking Ombudsman, Reserve Bank of India under Clause 8(1)(x) read with Clause 8(2)(a) of the Banking Ombudsman Scheme, 2006 (BOS-2006).

On approaching the Banking Ombudsman for the status of his complaint, the petitioner was informed that reply had been filed by Standard Chartered Bank. However, without supplying a copy of the reply, the compliant made by the petitioner was closed. Intimation regarding closure of complaint was issued to the petitioner.

In the order, it was stated that no objections had been filed by the petitioner were received by the Banking Ombudsman within the specified time frame, accordingly his complaint was closed under Clause 11(3)(c) of BOS-2006 as settled by the bank.

Counsel for petitioner argued that the Banking Ombudsman had misused the power given under Section 11(2) of the BOS-2006 and closed the complaint without giving any opportunity to the petitioner to present his case. The Banking Ombudsman had the power assume that the complaint is deemed close for lack of objections by the petitioner. However, it was argued that despite repeated requests petitioner was not provided a copy of the reply filed by the bank to enable him to file objections. It was also submitted that the RTI filed by the petitioner revealed that no opportunity of filing objections was granted to the petitioner.

Further, it was argued that the interest was charged at the rate of 16-18% which was against the 12.5% which is against the RBI Guidelines. It was argued that the methodology of computing the floating rates should be “objective, transparent and mutually acceptable to counter parties”. The bank could not have charged a higher rate of interest on its own as it was not the normal practice of the bank.

Per contra, counsel for respondent bank contended that Standard Chartered Bank is a private bank and not amenable to writ jurisdiction. It was argued that the agreement clearly mentioned variable rate of interest which was to be revised at the end of every three months. It was submitted that the interest was revised in accordance with the RBI guidelines and the petitioner was informed about the same.

Counsel for Reserve Bank of India contended that the RBI had regulated the interest rates charged by banks, and the rate of interest on loans depend on various external factors. However, it was submitted that the banks are required to intimate the borrower about any change in the terms and conditions including interest rate, service charges etc. it was also submitted that any change of rate of interest is to applied prospectively.

High Court Verdict

On maintainability of the writ petition, the Court held that the order of the Ombudsman has been challenged before the Court which can be challenged under Article 226 of the Constitution. Accordingly, it was held that the writ petition is maintainable.

Regarding the increased rate of interest, the Court observed that higher rate of interest was being charged from the petitioner throughout the loan period without any reasoning.

“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 Court observed that the notices being sent by the Standard Chartered Bank were on the wrong address and were never received by the petitioner. Although it was pleaded that emails were also sent to the petitioner regarding change of rate of interest, however, no much emails were placed on record before the Court. The Court held that the higher rate of interest being charged by the Standard Chartered Bank was in violation of RBI Master Circular dated 2.7.2007.

Clause 2.12 of RBI Master Circular provides that even though RBI has deregulated the interest rates to be charged, the banks ought not to charge interest beyond a level which seems “usurious” and does not conform to the normal practises of the bank. It has also been provided that the bank must prescribe an appropriate ceiling on the interest rate and suitably publicize the same.

The Court held that the variable rate of interest charged by the bank was not informed to and consequently, not accepted by the petitioner.

“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 Court held that the Banking Ombudsman is supposed to look into the grievances of the customers, however, he had miserably failed to adjudicate the case of the petitioner. The Court observed that the petitioner was not given any opportunity to reply to the objections filed by the Standard Chartered Bank.

Accordingly, the order passed by the Banking Ombudsman closing the complaint filed by the petitioner was quashed on grounds of being a non-speaking order, passed mechanically without application of mind.

The Court relegated the matter back to the Banking Ombudsman to pass fresh orders in accordance with law after giving an opportunity of hearing to the parties.

Case Citation: 2024 LiveLaw (AB) 38

Counsel for Petitioner: Utkarsh Srivastava

Counsel for Respondents: Anurag Khanna, Senior Advocate assisted by Sumit Kakkar for RBI and Himadari Batra for Standard Chartered Bank.

Case Title: Manmeet Singh v. Union of India and others [WRIT - C No. - 22011 of 2023]

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