In a landmark judgment, the Karnataka high court has directed the State Bank of India, its seven associate banks and 19 nationalised banks to "submit an account of the excess interest collected by them from the borrowers and deposit the same with the Reserve Bank of India... in the account of the Union of India."

Stunned by the development, the Indian Banks' Association is planning to move the Supreme Court challenging the Karnataka high court verdict. "We will move the Supreme Court. The IBA has done nothing illegal... It is impossible to calculate the exact amount to be returned to the Government's coffers. We are hopeful of getting a stay on the order... The banks may not be required to make provisions this year," said IBA secretary MN Dandekar.

The court has directed the RBI to "take immediate effective steps for implementation of our directions by calculating the excess interest collected by the banks and ensuring the same to be deposited in the funds of the Union of India".

Insight

The practice of rounding off interest tax to the next higher 0.25 per cent was in vogue till about a year and a half ago. This was done mainly to ease the calculation of interest tax. However, in the process, banks gained sizable amounts.

For instance in 1996-97, given an average total outstandings in the banking system at around Rs 250,000 crore, the extra interest tax taken (at about 0.15 per cent) would be Rs 300 crore for the year. And it needs to be remembered that the practice continued for several years, although it has since been discontinued. The Government aims to take over the excess amount because of the impossibility of returning the excess paid to each individual borrower, but as the IBA has said, it is difficult to calculate the excess amounts today, particularly if the effect of compounding is to be taken into account.

Nevertheless, if provisions have to be made, there will be a serious dent in banks' bottomlines.