The Reserve Bank of India (RBI) has raised serious concern over banks discriminatory retail loan pricing and has asked them why they are not passing the benefit of lower interest rates to the existing borrowers.
Last month, relating to this matter RBI issued a letter to the customer service department of the Indian Banks’ Association. In the letter the central bank has raised issues such as discriminatory pricing by banks for old and new customers and also raised concerns over teaser rates. The IBA has not sent a reply. An executive informed the matter will be discussed in the next management committee meeting.
A senior RBI official asked, “When the floating rate goes up, banks send notices to borrowers regarding the increase of equated monthly installment. If interest rate falls, then why do they not reduce?”
RBI said such discriminatory practices are totally against the principle of basic banking as a utility.
In recent weeks, RBI deputy governors Usha Thorat and K C Chakrabarty have publicly issued the statements showing concern over teaser rates, where the interest rate is fixed for the initial period of a loan and then moves to a floating rate structure and, on extending the benefits of a lower rate to all borrowers.
The banks while putting down the letter, said it was written before the third quarter monetary policy review, currently it is not possible for them to reduce rates for existing borrowers, because when the loans were sanctioned the cost of funds was higher.
Earlier also banks have informed that they cannot cut floating rates for existing customers because their liabilities are short term, with tenure of three to five years. But the regulator had refused to accept the argument put forward by the banks.
“That argument is not valid for the simple reason that all the deposits are not going out after three years. Around 70 per cent of bank deposits get renewed. So, that is permanent in nature. If that is not the case, then what is the meaning of core deposits?… We are asking why you cannot pass on the benefits of reduced rates to existing customers,” the RBI official said.
Regarding the teaser rates, the source said borrowers are being informed about the installment for the initial two or three years, when interest rates would remain fixed, before the loan process.
The official said, “For the remaining 18 years, nobody knows what the EMI (equated monthly installment) will be because it is floating. If it is floating, then it is fixed to what? Is the floating rate is fixed to bank rate, is it fixed to average deposit rate? They have to make it very clear”. RBI also wants to know whether banks worked out the cash flow levels when interest rates were increased.
Last year, State Bank of India was the first one to launch the teaser rates scheme offering a home loan product which had both a fixed and floating rate character. The product got good response from borrowers following which other banks also launched the similar schemes.
An SBI executive told that bank has not lowered the eligibility criteria and is clearly informing about the EMI and other terms to borrowers.
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1 comment:
Well addressed!
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