The Leeds West MP Rachel Reeves yesterday warned that up to 1.7 million people currently find themselves “trapped” in a debt cycle, as they face “disproportionate overdraft charges of up to Â£180 a month.
She argued that more must be done to prevent banks taking advantage of such “vulnerable” customers, many of whom face “impossible choices” between paying bills and increasing their borrowing.
And citing the successful introduction of a cap on fees for payday lenders, she has urged the Government to bring forward an equivalent cap for charges on overdrafts.
"Overdrafts are one of the most widely used credit products in the market... They can be a flexible form of borrowing and most people only use theirs a couple of months in the year," she told a Westminster Hall debate.
"However a significant minority of people - around 10 percent – are much more frequent users and are regularly going overdrawn for nine months or more each year.
"Regularly having to go into an overdraft, or over an overdraft limit, can lead to and exacerbate financial difficulties for many vulnerable customers who are already struggling.
"It is a disgrace that the banks are charging more than payday lenders for short-term lending and getting away with it. So the Government should take action."
Mrs Reeves' calls follow the publication of new research by the consumer group Which? that showed customers borrowing Â£100 from a high street bank can face overdraft fees of up to Â£180 if the debt runs across two monthly billing periods.
This is compared to the maximum charge of Â£24 that borrowers would incur on a payday loan.
Last year, the Competition and Markets Authority published a report on the sector that concluded banks were "not working hard enough" to help customers with overdrafts.
But the regulator fell short of imposing a cap, and the issue is now being investigated by the Financial Conduct Authority.
Responding to Mrs Reeves' comments, Treasury Minister Simon Kirby acknowledged there was an "inconsistency" in the approach toward payday loans and bank overdrafts.
"There is clearly inconsistency or we wouldn't be here having this discussion," he said.
He did not respond directly to her calls to legislate for a cap, but stressed that the Government will take "necessary action to ensure our banking sector is the most competitive... and also fair in the world”.