Court directs Reserve Bank of India to keep a check on the excessive rates of interest being charged by Non Banking Financial Companies

Madras High Court: While hearing a public interest litigation seeking to raise the issue of the excessive rates of interest charged by the Non Banking Financial Companies and praying to issue directions to Reserve Bank of India to formulate policies to regulate the same, the division bench of S.K. Kaul, C.J. and V. Dhanapalan, J., held that even if RBI does not specify the rates of interest to be charged by the NBFCs still the Central Bank must keep a check on the issue as it is a violation of  the Fair Practices Code.

The petitioner appearing in person put forth that the PIL centres around the impugned communication of RBI dated 03.05.2012 whereby it stated that it cannot fix the rates of interest to be charged by the NBFCs as they are governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs, but in order to ensure transparency, the RBI can advise the NBFCs to adopt a Fair Practices Code and lay down internal principles and procedure for determination of rates of interest. The Counsel for RBI, K.R. Laxman however argued that RBI does not specify any interest rate or ceiling rate but it specifies guidelines of Fair Practices Codes and complaints are examined within its parameters.

Upon perusing the facts and arguments, the Court observed that the RBI had issued several circulars to the erring NBFCs in the past to deal with the issue hence its impugned communication of 03.05.2012 is clearly misconceived. The Court further observed that there are borrowers who are illiterate or who borrow for personal need and given the history of the country where a borrower has always been traumatized by lenders charging high interest rates, hence the government took measures to issue norms to control the situation and nationalized the banks etc. but not with the objective of creating a new a class of institutionalized money lenders. Surprised at RBI for shrugging off its responsibility in this matter, the Court quashing the impugned communication directed RBI to look into the issue in accordance to their Fair Practices Code. A.R.Jeyarhuthran v. Union of India, decided on 14.11.2014    

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