The Reserve Bank of India's directive to banks to impose a ceiling on the interest charged, including processing and other charges, on small value loans is not expected to have a substantial impact on the rates charged.

On Monday, the RBI had asked banks to impose a ceiling and to publicise such information, in an attempt to curb the exorbitant interest rates on loans especially personal advances.

Bankers are of the view that the charges fixed by them are not usurious and they do not see any revision in charges. According to bankers, a 5-6 per cent charge over the prime lending rate for personal loans is justifiable as the risk premium for these non-collateralised loans.

"Retail business is an open market and banks are competing with each other. In a competitive environment, there is no space for usurious charges. The market determines the interest rates and charges. The interest rate is always ratified by the board,'' said a senior private sector bank official.

Some bankers said that the RBI and government have been forcing banks to direct lending towards agriculture, education and other priority areas. On the other hand, in a deregulated environment, banks are being asked to impose a ceiling on the personal loans, which help in recovering the lost margins.

"We may raise the issue before the Indian Banks' Association since there has been a lot of pressure to push loans towards the priority sector and small scale sector", said a senior banker.

Meanwhile, banks said the proposed ceiling will pressurise them to clearly differentiate between interest charges and other service charges.

"Banks will now be required to tell the customers what the total out-go can be at the outset. They will not be able to levy any hidden charges," said a senior official of a large bank.

Bank boards have been given three months to work out suitable procedures to avoid charging high rates to customers.

The move followed several complaints received by the RBI and the banking ombudsman' offices about excessive interest rates and charges on certain loans and advances.

Though the interest rates have been deregulated, rates beyond a certain level may be exorbitant. They are unsustainable and do not conform to normal banking prudence, the central bank said.

The RBI has also said the charges should be justifiable, in terms of the total cost incurred by the bank in extending the loan and the extent of returns that could be reasonably expected from the transaction. Further, the interest rates charged by banks should incorporate risk premium related to the internal rating of the borrower.