Banks Vs Home Loan Borrowers

Thursday, February 11, 2010

 By Vivek Jain

Indian Banks continue to follow a teaser pricing strategy - offering a low teaser rate for new customers while older customers pay 2-3% more than the rate offered to new customers.  The way it is done by providing a discount to new customers over the floating prime lending rate (PLR), which bank claim is set based on prevailing interest rate environment.

It is always a risk getting locked into one bank's loan because banks levy a charge if you want to transfer loan from one bank to another.  Even though prepayment charges are often low and nil in some case, it is not feasible for everyone to payback the loan first and then seek a new loan from another bank.  Also, once the property has been purchased, the new loan will be denied for policy reasons (Banks offer loans only for new purchases and not refinance existing properties) or may attract higher rate (in case, the reason cited is home repairs).

RBI (Reserve Bank of India) has issued a circular to IBA (Indian Banks Association) to explain the gap between the two rates and IBA today declined to make adjustments for old borrowers.  Moral advice does not seem to be helping, it is probably time for RBI to issue binding regulatory notifications.  One reason teaser rates are low is because of competition.  RBI should introduce competition once a loan has been taken.  This will keep banks on their toes.  For example, IRDA has capped Insurance Policy charges and mandated surrender charges to be zero for policies older than 5 years. This ensures Insurance companies can lose customers if their service levels fall.  RBI can take the cue and mandate the following -

1. All loans more than 3 years old should have zero prepayment charges.
2. Banks cannot levy loan transfer charges after 3 years of loan. Once competition is introduced for the whole life of the loan, banks will be forced to offer good rates for the entire tenure of the loan.
3. Banks cannot offer teaser rates which are more than 1% lower than the existing prime lending rate (PLR) for home loans.

RBI needs to act and act now.