The woes of overdrafts and compound interest at banks

Dear Editor,

The Bank of Guyana (BOG) has to properly monitor financial lending institutions to ensure that they always function within the guidelines of the FIA Act of 1995.

Commercial banks charge fees to accounts for services and if the account does not have enough money to offset such charges, the banks resort to charging an overdraft for that amount, so they can receive their fees payment on time. They further charge a fixed overdraft interest which will go to the borrower’s reducing balance, and will be deducted when the borrower’s account is replenished.

In the system of financial scheming practised by lending institutions in Guyana the phrase ‘compound interest’ has been removed and replaced by the words ‘payment on reducing balance’.

The commercial banks and lending institutions do not explain to borrowers that they would have to pay compound interest on loans for which payments are overdue. They leave the borrowers to think that they only have to pay simple interest on the principal. The borrower who may not have any idea of some of the lending institutions’ profiteering systems, find him/herself paying and paying and cannot pay off his or her loan due to compound interest.

The Republic Bank has a $1,500 fixed overdraft interest on fees or bank charges, of which an overdraft has been given. At one time my account was debited $3,000 for a 30 dollars overdraft balance at the Republic Bank. Is this not profiteering? The Republic Bank has advertised an 18 percent overdraft interest per annum yet charges 3,000 dollars for a 30 dollars overdraft for two months.

Scotia Bank on the other hand charges a fixed $3,500 overdraft interest on any balance due to the Bank even if it is $100 dollars. This is profiteering in the name of interest.

Editor, this is my own experience with Scotiabank. On Wednesday the 25th of September, 2013, I received a large number of letters. In my village Yarrowkabra, postmen do not deliver letters to homes. The letters were left at a shop which has an arrangement with the post office. To my surprise, in one of the banking statements I noticed I owed the bank an overdraft balance of $7,500.

To clear the loan balance of $7,500, the bank gave me an overdraft for that amount unknown to me; then charged an overdraft interest of 3,500 dollars and placed it on my account, which took my overdraft balance due to $11,000. But that was not enough interest for the bank, the bank added $56,000 as total overdraft interest on my account which has been closed for over a year. The $7,500 gained $56,000 dollars interest over 16 months.

How could a bank advertise an 18 percent interest per annum yet charge $42,000 in interest on $7500 overdraft a year?

If the bank was charging 18% simple interest on a $7,500 overdraft per annum, the interest payment would be $1,350 per annum but I am asked to pay $40,650 more per annum due to the unjust system.

Editor, this level of profiteering does not give businesses space to recover from any downfall, it increases their burden. The BOG seems not to understand that they also have a duty to prevent exploitation and profiteering.

I borrowed $100,000 from GBTI at 22.75% per annum on an overdraft in 1998. I repaid around $250,000 but recently they sent me a balance of $1.5 million on 20 September 2013.

If the bank was charging simple interest for that same period of time I would have had to pay $100,000 principal and about $341,250 interest -a total of $441,250.

I am therefore urging the BOG to monitor this and other institutions to end this exploitation.  I also feel compound interest should be stopped, it is an oppressive system that is also at odds with Section 13 of the Money Lenders Act 91:05.  This Act does not apply to commercial banks, only money lenders; but this creates a double standard in money lending for interest. Many businesses had to be closed overs the years because of compound interest.

Let small businesses prosper too.

Yours faithfully,
Michael Carrington
AFC Executive member    

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