SC terms rounding up of interest rates illegal

The Supreme Court has asked banks and financial institutions to shell out Rs 50 lakh each towards a fund for the benefit of the physically and mentally challenged as an atonement for their wrong action in rounding up interest rates to the next higher 0.25 per cent, leading to the collection of excess interest from borrowers.

As per the Interest Tax Act, the interest received by scheduled banks/credit institutions on loans and advances is liable to an interest tax of 3 per cent. The interest tax burden is passed on to the borrowers.

In doing so, banks / financial institutions round up to the next higher 0.25 per cent the final interest rate charged of borrowers on account of "grossing up" involved in calculating the incidence of tax.

For example, if you borrow Rs 100 from a bank at 10 per cent interest, then inclusive of the interest tax you should normally be charged Rs 10.30. The bank, however, will resort to rounding up and charge Rs 10.50.

Banks/FIs are believed to have collected an additional sum of about Rs 725 crore from more than five crore borrowers by resorting to rounding up of interest rates.

In the Indian Banks' Association and others vs Devkala Consultancy Service and others case, the SC observed that "a huge sum of money is to be recovered from the Union of India as also a large number of banks. Directions may be issued for refund of the amount to the borrowers, but implementation thereof would take a long time. The Court may not be able to effectively monitor such recovery. We, therefore, are of the opinion that a fund may be created for the benefit of the disadvantaged people."

The Court directed the appellant and other concerned banks to contribute to the extent of Rs 50 lakh each for the Fund.