Banks are playing every trick in the book to ramp up their client base — even if this means a rate cut through a change in spread that benefits new consumers

Base rate is still heavily loaded against existing customers

Banks are playing every trick in the book to ramp up their client base — even if this means a rate cut through a change in spread that benefits new consumers

Your home loans will now cost less, screamed newspaper headlines after the Reserve Bank of India (RBI) announced a cut in the cash reserve ratio recently. Obviously, you hoped your home loan lender was all ears and would reduce your EMI burden soon. The next week, your anticipation turned into delight as your bank effected a cut in home loan rates for the “festive season”. You started planning for all the things that you would be able to buy from the money you save by way of reduction in EMI whose burden had increased manifold over the past few years. You called up your good friend — who is fairly knowledgeable in financial matters — to share the good news. But he sobered you up by asking whether your loan was from a bank or housing finance company. He chipped in with more: “See, banks are governed by the RBI which instituted the base rate system way back in July 2010 to make the floating rate system more transparent.” You stated happily that your loan was indeed from a bank — and that too from a PSU one — and not from a housing finance company (HFC). Now, you sit back and eagerly wait for the letter from your lender announcing a reduction in EMIs. Unfortunately, it may be an endless wait. Here is how the cookie has crumbled on the base rate mechanism that started with much fanfare. Take the example of this large public sector bank. Let’s say there are 6 twin brothers with the same income and working at the same company with the same qualifications and other assets and liabilities. The only difference is the brothers bought their homes at different points of time in the same building and took the exact same loan amount of `30 lakh from the same PSU bank. Here is what they would be paying today. So, as you can see, even at a PSU Bank, the earliest consumer (Brother A) is paying a penalty of a whopping 2% p.a. as compared to his Brother F who is paying only 10.50%. In fact, Brother E feels most cheated because he is paying a penalty of a massive 0.50% p.a. for becoming a consumer of the PSU bank just 45 days before his Brother F. Let me add that private sector counterparts as well as HFCs also seem to be in the same boat. All recent announcements from major banks with respect to reduction in home loan rates disguised as festive offers have been by way of a change in the spread with reference to the base rate, which means only new consumers benefit. The only major bank that has actually reduced the base rate is the State Bank of India (SBI). But please remember that even the SBI has announced several interest rate cuts by way of a change in spreads over the past few months. Clearly, if RBI’s intention is to make floating interest rates more transparent by introducing the base rate mechanism, it has not worked. The National Housing Bank (NHB), which governs housing finance companies, has also issued a circular banning differentiation between old and new consumers. It is yet to be seen what action the NHB takes, now that differentiation by HFCs between old and new consumers is a reality even after the circular was issued. Both the RBI and the NHB have banned pre-payment charges on floating rate loans, thus allowing at least more aware consumers to change their lenders without paying a fee or get the existing lenders to reduce the interest rate. In the current regulatory environment where the prevailing principle is Buyer Beware, even this is a great step as it at least allows aware consumers to get lower rates. But if the regulators really want to make sure that existing consumers get a fair deal, it is not very difficult to enforce the regulations. First, disallow any changes in the spread except due to a credit downgrade. Make sure that each consumer account is rated — required anyway under the capital adequacy norms (CAR) — and that any downward change in rating is compulsorily communicated to the consumer. Also, the CAR should be calculated based on the rating used for pricing the loan, which means higher capital will be required if this particular consumer rating is downgraded. If followed with rigour, this should solve the issue of differential treatment of old consumers without restricting the lenders’ ability to charge more if the consumer risk has increased. The bottomline is clear – Be vigilant or pay more. The choice is entirely yours.