The deceit and loot in home loans

Shriniwas Marathe, a volunteer with Moneylife Foundation, is a retired banker. In September 2015, his wife and son took a home loan from a public sector bank at a floating rate of 10 per cent. On March 1, 2017, when he enquired about the rate of interest rate applicable to him, the bank told him that the interest rate was 9.75 per cent. By this time, the Reserve Bank’s repo rate had dropped from 7.25 per cent to 6.25 per cent while the bank’s base rate, the benchmark, was down from 10 per cent to 9.75 per cent. But the bank had not reduced the equated monthly installment (EMI).

Satyam Savla availed of a home loan from a private sector bank in September 2007, when the bank prime lending rate was 14 per cent. In August 2012, he realised that his rate of interest was 17.5 per cent — a rate as high as unsecured loans — and the number of EMIs had been increased to 123 from 108. Only when he raised the issue with the bank had it brought the rate down 12.3 per cent in November 2012 and the number of EMIs came down to 114 from 123.

Both Mr Savla and Mr Marathe argue that the RBI has issued comprehensive guidelines to banks on how to charge for loans. The Master Circular of July 2010 says: “In the case of existing loans of longer/fixed tenure, banks should reset the floating rates according to the above method at the time of review or renewal of loan accounts, after obtaining the consent of the concerned borrower/s.” This clearly puts the onus on banks to communicate to borrowers, take their consent, and reset the rate. An unfair and unethical system will quietly keep looting customers until they come forward. When Mr Savla asked the private bank why this was not done, the bank said that his sanction letter “does not mention loan to be reviewed”. Mr Savla has since raised the issue with the Banking Ombudsman, which expectedly fobbed him off. The RBI, too, expectedly, refuses to answer his queries. As I have pointed out many times, regulators in India are by nature anti-consumer.

The stories of these two gentlemen is representative of millions of home loan borrowers, who are told by an excited media with every downtick in interest rates how their loans have got cheaper. But the brutal fact is this: For banks, floating rates remain fixed when the rates go down — they don’t reduce rates. But the same rates get unfixed when the rates go up — they are quick to hike rates. But the question is: Do even those who are quick to ask their banks to reduce interest rates get a fair deal?

Mr Marathe, being a banker with mathematical skills, has dug into the RBI guidelines on interest, and trawled the websites for every scrap of information he could on banks’ costs and lending rates. Here are his findings.

The base rates declared by most of the banks have not changed more than 50 basis points since January 1, 2015, when the RBI initiated rate cuts vigorously. In fact, the repo rate has dropped from 8 per cent on January 1, 2015, to 6 per cent now.

The RBI introduced the MCLR (Marginal Cost of Lending Rate) on April 1, 2016, after realising the reluctance of banks to reduce interest rates on their advances in line with the repo rate changes. However, Mr Marathe’s enquiries with his bank revealed that the bank circulated these guidelines with a delay of two months to their branches. 

Most banks have either not informed the borrowers at all or have selectively informed them about rate changes. Mr Savla insists that the private bank in question did not inform him. In these days when we are moving towards paperless banking, this could well have been done through SMS/e-mail, especially when banks have no problem in communicating the hike in charges instantly. 

Mr Marathe strongly suspects that banks are violating the RBI’s guidelines in calculating the MCLR correctly, leading to unfairly high interest rates being charged to borrowers. He is convinced that banks are recovering bad loans — a product of poor credit decisions and corruption — from borrowers by overcharging them. To prove his point, he filed Right to Information (RTI) applications on seven banks but they, mostly banks, stonewalled him.

When customers approach banks for reducing rates, they arbitrarily charge them a fee. 

The RBI has been eager to help banks loot their customers for over a decade now. The malpractice started in 2008, when banks started to offer lower rates to new customers. In 2010, the RBI asked banks to reset loans, but the circular sneakily said: “Existing loans based on the BPLR system may run till their maturity. In case the existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any fee for such switch-over.” Under the MCLR the loot was complete when even the last sentence was dropped. It has been one-way loot since then. Since borrowers are not a pressure group and can’t calculate how much they are losing, there is no furore. More on this issue next time.

The writer is the editor of
Twitter: @Moneylifers