A few days ago all newspapers carried a story headlined “RBI not satisfied with MCLR (marginal cost of funds based lending rate), asks banks to lower rates further”. Many were probably impressed that the Reserve Bank of India (RBI) was trying to give a fair deal to consumers. Those with loans may have looked forward to reduced equated monthly instalments (EMIs). Well, the facts on the ground are quite odious and this is proved by the fact that headlines like this are frequent. Banks run a business that is essentially ‘heads I win, tails you lose’. As mentioned in my previous piece, when interest rates go up, banks are super quick to revise the rate upwards but when interest rates go down, borrowers have to go to the bank branch and haggle about reducing their rates. Only deposit rates are reduced immediately. Each bank, arbitrarily and capriciously, charges borrowers for the favour of reducing the rate. It is clear as daylight to anyone that a charge or a cost to simply the reduce interest on a floating rate loan is extortion, but this is exactly what the RBI has officially sanctioned. Under a circular issued in 2010, banks could not charge customers for changing the rate. In April 2016, the RBI dropped this clause, allowing each bank what it wanted. Is it because bankers, not customers, have the RBI’s ear all the time?
Will banks oblige a “dissatisfied” RBI by correcting rates? So far, I have researched only on the home loan loot and not the pillaging of small businesses, which are forced to buy insurance if they need bank loans, apart from being regularly overcharged on interest. The RBI says that it is considering a new market-linked benchmark to ensure a better transmission. Viral Acharya, the new deputy governor, was quoted as saying “the experience with the MCLR system introduced in April 2016 for improving monetary transmission has not been entirely satisfactory” and that the RBI has constituted an internal study group across several clusters on “various aspects of the MCLR system and to explore whether linking of the bank lending rates could be made direct to market determined benchmarks going forward”. Remember, the RBI here is concerned with only business lending, since cutting rates has not pushed up economic activity, as expected. It is not bothered about the actual banking practices regarding retail loans, which affect a large swathe of hardworking people. Here are some facts that Mr Acharya and the internal study group may like to know if they are interested in how banks have treated home loan borrowers.
The March 2016 RBI circular on the MCLR stated that its directions would come into effect from the day it is put on its website. Earlier circulars of the RBI had introduced the concept and modalities of the new MCLR regime from October 2015, so banks should have been equipped to implement it almost instantly. Shriniwas Marathe, a retired banker, has spent hundreds of hours digging into the user-unfriendly websites of the RBI and public sector banks, followed by Right to Information (RTI) applications to get a picture of how banks loot home loan borrowers. His interactions with bankers revealed that many banks did not implement the guidelines till June 2016 and some may have implemented them only by September 2016. However, when he filed RTI applications with seven banks to know the exact date of implementation of the MCLR regime, he was stonewalled. If some banks have taken six months to implement the RBI’s circular, does it not amount to overcharging and criminal breach of trust on the part of these banks? If the RBI does not bother to act against them, what should we conclude?
In a more unfair anti-consumer action that the RBI seems to be unaware of, some banks have also inserted a clause to say that they will reset “floating” interest rates only once a year for home loan borrowers. There was no such clause when interest rates were rising steadily. There is more to this subterfuge. Mr Marathe found that despite a specific format designed by the RBI for obtaining acceptance from borrowers to lower the rates, most of the banks did not communicate the change in interest rates to the borrowers. Some privately claimed to have published these guidelines on their respective websites. Mr Marathe sat with a few bankers and asked them to show him where in the banks’ websites this information was put up; bank officials themselves were unable to locate it. Since banks have got away with fooling home loan borrowers all this while, can we conclude that either the RBI is either unaware of the ground realities, or is batting for the banks? There are many more dimensions to the home loan issue. In my next piece I will go into detail as to how there was enough room for banks to fix the MCLR itself, in their favour.
The writer is the editor of www.moneylife.in