Central Bank limits penalty interest rates charged by banks
Monday, 5 August 2013 00:00
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By R.M.B. Senanayake
The Central Bank (CB) has imposed a limit on the so-called penalty rates charged by banks from customers who default or delay repayments. Some analysts think this will send the wrong signal to borrowers and even provide an incentive for borrowers to deliberately delay repayments. May be so, but the banks could be stricter as defaulters delay while having the capacity to repay. The banks will no doubt raise the interest rate risk premium so that in the long run it will raise interest rates all round.
But it must be said that the banks have no legal power to impose penalties as they are so empowered by law. When a cheque is returned, the bank charges a penalty from the customer who deposited the cheque. While the bank may be entitled to recover the actual costs involved in handling the cheque defaulted they do not have the power to impose a penalty,
Last week I received a notice from DFCC Vardhana Bank renewing my fixed deposit at 10.25%, a drastic reduction in the rate at which I originally made the fixed deposit. I informed the bank that I was not renewing the deposit. I called over to surrender the Deposit Certificate the next working day. The bank informed me that they have to send the money by RTG and the cost will be on my account. I asked for a cheque instead. I was told that they would charge Rs. 300 for the cheque.
How can the bank charge me for returning my own money? Should not the bank bear such cost? A week had elapsed since the expiry date of my deposit and the bank had informed me that they had renewed my deposit. Hence I feel I am entitled to interest for the one week. Not only was I denied interest for the week but was to be charged Rs. 300 for the return of my money. The Central Bank should look into these unfair practices followed by the banks.
The problem is that there is no competition among the banks either on price or conditions of lending. The two State-owned banks are the market leaders and they cross-subsidise the interest rates charging less from the public sector and imposing higher rates on the private sector. Since the banks are in a cartel all the other banks follow the high rates charged from the private sector by the two State banks.
The lack of competition is further heightened by the ownership rules imposed by the Central Bank. Limiting maximum shareholding to 10% for an individual and 15% for a group means that the owners of the bank have no say. The private banks have no controlling shareholders and hence the banks are run for the benefit of the managers. They are risk averse and are not called upon to perform. Their salaries and perks are determined by themselves unlike in India where the RBI must approve the emoluments of bank managerial staff.
