KARACHI, Aug 1: Banks are involved in over-charging the borrowers as they change the floating rate or include a clause in agreement with a customer, which allows them to increase interest rate.
This was observed by the State Bank, which issued a circular on Wednesday to curb the wrong practice of banks.
“It has been observed that some banks change the margin over Kibor during the tenor of the loan,” said the SBP circular.
Banks and DFIs have to determine the margin over Kibor (Karachi Inter-Bank Offered Rate) at the outset of the transaction.
“Once the margin is agreed with the customer, bank and DFIs should not increase it during the tenor of the loan,” said the SBP adding that punitive action could be taken if the instructions are not followed by the banks.
The circular further says in some cases, banks or DFIs include clause(s) in the loan documentation, which allow them to change the margin anytime during the tenor of the loan.
“This practice defeats the purpose of establishing a benchmark for pricing a floating rate loan and is also against the instructions of the SBP,” it said.
In order to ensure transparency in the pricing and documentation of loans, the SBP issued a number of instructions for banks and DFIs.
Banks and DFIs will clearly indicate in the loan documents whether financing is on fixed rate or floating rate basis. In case of fixed rate loans the rate shall not be increased during the tenor of the loan.
In case of floating rate loans, banks and DFIs will clearly specify the margin over the benchmark (Kibor) or any other rate). Also the banks and DFIs will not increase the margin during the tenor of the loan.
All banks and DFIs will clearly spell out the pricing (Kibor or any other benchmark rate plus a pre-defined margin not changeable to the detriment of the borrower during the term of credit) and the re-pricing frequency in their loan documents, said the circular.
In case of re-pricing, the rate will change only if there is a change in the benchmark rate (Kibor/other benchmark) over the tenor of the loan. The loan agreement should not contain the clauses or stipulations to change the rate unilaterally.
All charges, other than mark-up, including fees, prepayment penalties etc. to be recoverable by banks or DFIs should be determined and clearly disclosed to the customers at the time of entering into agreement. All such charges will be locked and their upfront full disclosure will be made and agreed with the customers in the loan agreement.
A complete amortisation schedule should be provided to the customers along with the facility offer letter showing the break up of principal and mark up to be paid by them over the life of the loan and finance or till the next re-pricing date for fixed and floating rates, respectively.
In case of resetting or revisiting the floating rates, a new amortisation schedule should be issued to all existing customers informing them about the new rates on loan or finance, which should be determined in line with the benchmark agreed at the time of lending.
As implementation of requirement may require changes in the IT system, banks and DFIs should make necessary arrangements for updating their IT systems within a period of three months of issuance of this circular for issuing new amortisation schedule on re-pricing of loans to the existing customers.
For new customers and borrowers banks and DFIs will implement this requirement immediately.
A statement showing outstanding position of the principal amount and markup should be issued to the customers on half-yearly basis or more frequently as per policy of the bank and DFIs.
The loan and other documents obtained from the customers should be duly filled in at the time of signing of the loan agreement.
Any negotiation with the customers for restructuring or rescheduling of a loan or facility should be done in writing and in a transparent manner in accordance with the duly approved policy of the bank or DFI.
All banks and DFIs are advised to ensure strict compliance of the instructions in letter and spirit as non-compliance will attract punitive action, the circular added.
