George Mathew
Posted: Thu Oct 27 2011, 00:44 hrs
Mumbai
After waiting and watching for quite some
time, the Reserve Bank of India (RBI) has finally decided to get tough
against the discriminatory pricing of loans and the huge prepayment
penalty — up to 2 per cent of the outstanding loans — being charged by
some banks.
The RBI has decided to set up a Working Group to look
into principles governing proper, transparent and non-discriminatory
pricing of credit. This panel is expected to look into different rates
for old and new loan customers. Banks and housing finance firms charge
different rates for their old and new loan customers. While old
customers usually get the stick of high rates, new customers are wooed
with carrots like waivers of charges, lower rates and other incentives.
The fleecing of customers in the form of penalty on foreclosure or
prepayment of loans and different interest rates for old and new loans
has been going on for quite some time.
Unveiling the monetary
policy on Tuesday, the RBI said it has decided to implement the
recommendations of the Damodaran Committee, on which a broad consensus
has emerged, as also the action points which were identified by the
Indian Banks’ Association (IBA) and Banking Codes and Standards Board of
India (BCSBI) in the last Banking Ombudsman conference. Banks had
agreed to stop prepayment penalty on floating loans at the Ombudsman
conference, but most banks are yet to stop this practice.
Customers of many banks in India can’t easily make
prepayment and transfer their loan from one bank to another bank or from
fixed to floating or vice versa. High pre-payment charges of some banks
are seen as a restrictive practice deterring the borrowers from
switching over to cheaper available source. However, the RBI is yet to
come out with more clarity on the issue guidelines as banks want the
current dispensation to continue. “We will stick to the charges if we
have already signed a contract or agreement with our old customers. In
that case, I do not agree with uniformity of charges for old and new
customers,” said Bhaskar Sen, CMD, United Bank of India.
The National Housing Bank -- the regulator for housing
finance companies -- last week asked housing finance companies (HFCs) to
stop charging fee for prepayment for home loans on the floating rate
basis. It also asked HFCs to stop charging different rates for old and
new customers. This happened despite opposition from HFCs.
Currently, different banks follow different rules, “We
extend loan switchover facilities to our customers. We never restricted
it to home loans... rather we even allow it for both the auto and
personal loans. The prepayment fees charged by the bank depend from loan
to loan as fixed by the bank. For example, home loan has different
prepayment penalty charge, while auto and personal loans are charged
little more than home loans,” said VR Iyer, ED, Central Bank of India
These issues were emphatically raised by the RBI committee
on customer services of banks, chaired by former Sebi chairman M
Damodaran. “In a floating interest rate scenario, when an entire class
of borrowers has the same characteristic and risk level, the point of
entry in time (old customers and new customers) should not create
discrimination in interest rate offered to the customers. Measures to
stop practices of discriminating between new and old customers with
identical risk profiles on the basis of interest rate offers, must also
be initiated,” the panel said.
Agreeing to this view, Ramnath Pradeep, former chairman
and MD of Corporation Bank, said, “I think all banks should go ahead
with this proposition to maintain a healthy relationship with their
prospective customers for a long-term business with them. As far as the
banks’ asset liability is concerned, I don’t think it will be be
affected.”
The panel also proposed that all banks must permit home
loan borrowers to switch over from fixed to floating rates or vice versa
at least once during the loan tenure at an appropriate and reasonable
fee. At present, while some banks don’t permit such switch-overs, many
others make it prohibitive. “For priority sector and small loans, we do
not charge prepayment fees to our customers, but for big loans, it is
must. For big loans, the customer keeps shopping from one bank to the
other in order to get interest discount for his loans. In that case, the
bank gets affected due to asset-liability mismatch,” said M Narendra,
CMD, Indian Overseas Bank, arguing for status quo.
On the high home loan foreclosure charges, the panel said
banks should not impose exorbitant penal rates towards foreclosure of
home loans and “a policy should be devised to ensure that customer is
not denied of opportunity to enhance his economic welfare by making
choices such as switching to other banks/ financial entities to enjoy
the benefits conferred by market competition”. The regulations are also
silent on issues such as teaser rate loans, festival loans and several
such promotion schemes.
— With Madhusudan Sahoo
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