Please bear with me, as I write one more article on my favourite bugbear - banks charging higher interest to existing home loan consumers, while laying a red carpet (and low rates) for new ones. This is a personal experience.
I had taken a small home loan about two years ago from a bank (call it A), which has dwindled to single-digit lakhs due to repayments. The loan had been on very fine rates when taken but in the past two years, the bank had reduced its rate for new consumers such that I was now paying 10.50 per cent per annum, whereas A was charging 9.85 per cent to new consumers, which means I was overpaying interest of 0.65 per cent.
In the normal course, I would have shifted the loan long before the differential became so large but the amount was not so large and I realised that personal finance columnists are subject to the same forces of inertia that they want lay consumers to overcome.
I still loathe transferring the loan to another bank because the administrative road blocks erected by the banking industry to prevent these transfers make it a very difficult process. And, the loan has to be of a certain size before it makes sense for the consumer to shift to another bank. Like other banks, even A had a scheme wherein by paying a certain fee, I could shift my higher cost "floating rate" loan to a lower cost. I sent a written request to the loan centre of A for this scheme and my colleague who had taken the letter came back with a scribbled offer on my letter itself (which they did not accept) asking me to pay a one-time charge of one per cent to reduce the interest rate to 10 per cent (still much higher than the 9.85 per cent new consumers were being charged). That offer was not acceptable and I asked my colleague to deliver the request letter and ask them to make the offer in writing, as I wanted to take it up in the grievance procedure. This is when I got the shock of my life. The manager at A's loan centre refused to accept the letter and give an acknowledgement for the letter. They told my colleague I would have to come personally to the branch if I wanted to discuss the matter and they would not give any offer in writing. I had to send the letter by registered post and filed a complaint with their grievance redressal officer, also by registered post, as by now I thought even they would refuse to accept the letter.
The episode was shocking, as this was one of India's largest private sector banks and it was behaving like a delinquent debtor trying to dodge his creditors' legal notice. I personally know and have huge respect for the chief executive officer of this bank and its top management. Clearly, making themselves aware of such issues is not on their priority list simply, because there is no systemic or regulatory pressure to clean up this act. My grievance will be taken up in due course and in the end, the bank will be directed to solve my grievance which they duly will. But the bank is well aware that the regulator or the grievance redressal mechanism is not going to haul them up for behaving in a manner that is unbecoming in a small time businessman what to say about a bank that runs on the trust it enjoys from stakeholders.
The regulator is clearly complicit in encouraging this behaviour, as it is refuses to take any serious action on such issues. Reserve Bank of India cannot wash its hands off the issue by saying consumers have been allowed to switch banks without any fees and then allow banks to erect such procedural and operational roadblocks that make it impossible for a lay consumer to actually take advantage of this regulation. There is no point in putting pressure on banks to reduce interest rates for new consumers when existing consumers continue to groan under an unwarranted high interest cost. The reduction for existing loan consumers does not require monetary policy action just resolute implementation of existing RBI regulations. This is one place where the finance ministry can put pressure and get the banks reduce interest rates without reducing headline base rates. Hope somebody is listening.
I had taken a small home loan about two years ago from a bank (call it A), which has dwindled to single-digit lakhs due to repayments. The loan had been on very fine rates when taken but in the past two years, the bank had reduced its rate for new consumers such that I was now paying 10.50 per cent per annum, whereas A was charging 9.85 per cent to new consumers, which means I was overpaying interest of 0.65 per cent.
In the normal course, I would have shifted the loan long before the differential became so large but the amount was not so large and I realised that personal finance columnists are subject to the same forces of inertia that they want lay consumers to overcome.
I still loathe transferring the loan to another bank because the administrative road blocks erected by the banking industry to prevent these transfers make it a very difficult process. And, the loan has to be of a certain size before it makes sense for the consumer to shift to another bank. Like other banks, even A had a scheme wherein by paying a certain fee, I could shift my higher cost "floating rate" loan to a lower cost. I sent a written request to the loan centre of A for this scheme and my colleague who had taken the letter came back with a scribbled offer on my letter itself (which they did not accept) asking me to pay a one-time charge of one per cent to reduce the interest rate to 10 per cent (still much higher than the 9.85 per cent new consumers were being charged). That offer was not acceptable and I asked my colleague to deliver the request letter and ask them to make the offer in writing, as I wanted to take it up in the grievance procedure. This is when I got the shock of my life. The manager at A's loan centre refused to accept the letter and give an acknowledgement for the letter. They told my colleague I would have to come personally to the branch if I wanted to discuss the matter and they would not give any offer in writing. I had to send the letter by registered post and filed a complaint with their grievance redressal officer, also by registered post, as by now I thought even they would refuse to accept the letter.
The episode was shocking, as this was one of India's largest private sector banks and it was behaving like a delinquent debtor trying to dodge his creditors' legal notice. I personally know and have huge respect for the chief executive officer of this bank and its top management. Clearly, making themselves aware of such issues is not on their priority list simply, because there is no systemic or regulatory pressure to clean up this act. My grievance will be taken up in due course and in the end, the bank will be directed to solve my grievance which they duly will. But the bank is well aware that the regulator or the grievance redressal mechanism is not going to haul them up for behaving in a manner that is unbecoming in a small time businessman what to say about a bank that runs on the trust it enjoys from stakeholders.
The regulator is clearly complicit in encouraging this behaviour, as it is refuses to take any serious action on such issues. Reserve Bank of India cannot wash its hands off the issue by saying consumers have been allowed to switch banks without any fees and then allow banks to erect such procedural and operational roadblocks that make it impossible for a lay consumer to actually take advantage of this regulation. There is no point in putting pressure on banks to reduce interest rates for new consumers when existing consumers continue to groan under an unwarranted high interest cost. The reduction for existing loan consumers does not require monetary policy action just resolute implementation of existing RBI regulations. This is one place where the finance ministry can put pressure and get the banks reduce interest rates without reducing headline base rates. Hope somebody is listening.
The writer is a registered investment advisor.