Sooner or later, banks will realise that retaining a customer is easier than acquiring a new one
Recently, a good friend of mine was complaining about the behaviour of her bank ever since she took a home loan from them. Though home loan was a “fixed” rate, the bank promptly increased her interest rate when the rates went up.
And to top it all, when she called up to enquire about the change, she was curtly told to read the loan agreement where the bank had clearly reserved a right to increase the “fixed” interest rate.
Grumbling about the bank’s behaviour, she happened to mention the sharp contrast in their behaviour when she had applied for the home loan.
As both she and her spouse work at the middle management level for a leading MNC and individually draw a six-figure pay packet per month, the bank actually went overboard when she applied for the home loan.
She confessed that the sales person from the same bank, not so long ago, was wooing them and willing to answer her every query to get her as a client.
All in all, a very satisfying experience, as she did not have to move out of her office even for a minute during the entire loan process.
Nostalgia took over when she laughingly compared the bank’s behaviour with her spouses’ when she was a girl friend and now when she is the wife. The courtship period was dazzling with taxi rides and dinners at top restaurants; but post-marriage, it came down to auto-rickshaws (before they bought their car) and the neighbourhood Udipi joint. Of course, she did not sound as unhappy with her spouse as she is with the bank.
However, her deft comparison of the ‘girl friend versus wife’ set me thinking. Study after study has concluded that it is far more profitable to retain an existing consumer than to get a new one.
Yet, in the retail lending industry, there are numerous instances of banks giving step-motherly treatment to their existing consumers while running behind new consumers with ever more attractive offers and discounts.
Take the case of interest rates on a “floating” basis, which are supposed to come down when interest rates are falling and increase when the interest rates are increasing.
While as a girl friend (read new consumer) you can negotiate a sweet deal, problems start occurring after marriage. The spouse (read the bank) forgets to reduce rates when they drop, but is prompt in increasing rates.
Why does this happen? The only answer I can think of is the nature of the banking organisation. When a lot of promotions and bonus packages begin to hinge on the addition of new clients rather than retention of existing clients, the focus is automatically on gaining numbers rather than retaining the numbers.
Also, hardly anybody within the bank is adversely impacted when an existing consumer is dissatisfied, leaves the bank and refuses to come back for future needs. However, the bank itself pays a huge price for this consumer dissatisfaction.
The only possible reason for this may be the Indian system, which does not encourage divorces. However, the new Indian consumer is refusing to take things lying down and increasingly preferring to take a stand on various issues. Sooner or later, the banks will have no option but to sit up and take notice.
For banks, it's still girlfriend over wife
Some stories never change, like the differential treatment meted out by banks to their old and new customers.
Much has been written about how, in India, floating rates only mean interest rates go up when general interest rates rise but stubbornly refuse to fall when the general interest rates fall and how, as a result, existing home loan customers pay a far higher rate for the same loan as compared to new customers (see my article, 'Of wives and girlfriends, and why loyalty matters', in DNA Money on February 5,2007. The old and new customers can be likened to the wife and girlfriend, respectively —- over time, the current new customer (girlfriend) becomes old (wife) and suffers the same fate.
Many a committee has recognised this unfair treatment of 'wives', but the cycle continues. Even the base rate mechanism evolved by the Reserve Bank of India (RBI) to solve this problem has proved ineffective —- some creative foreign banks have increased the spreads over the base rate for old customers and unless checked, others could follow.
The latest development in this story is a National Housing Bank circular, dated October 19, "advising" housing finance companies to "apply uniform rates of interest to the old and new borrowers who have the same credit/risk profile."
Easier said than done. Unless supplemented with further action, this too will remain an 'advice' the housing finance companies will ignore.
"This looks like a PR exercise by NHB to look good to the public," said an industry veteran when I asked him for his reaction to the circular.
Indeed, if the regulator was serious about implementing this directive, it would not have couched it as an advisory, that too with an escape hatch like "same credit/risk profile." All it needed to do was call for data on the current interest rates being paid by consumers, segmented by the month in which the loan started, and it would have become clear that people who took loans prior to June 2009 are paying significantly higher interest rates compared with those who came after.
What the regulators need to do is:
l Ensure that prepayment charges are abolished (NHB has already done that and hopefully the RBI will follow suit);
l Make sure a standardised and suitable loan transfer mechanism is agreed upon by all lenders (banks as well as housing finance companies) so that non-financial barriers are not created while transferring loans from one entity to another; and
l Put in place penal consequences for non-compliance on both these points.
This will ensure that at least the alert customers are able to get the benefits of the new rates immediately. Regulations for the vast majority of customers who are unaware of the rates can follow in due course.
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