Will rates decline for them?

Till an RBI-appointed committee decides how greater transparency can be brought to fixing of banks benchmark rates,a few measures taken immediately could ameliorate existing borrowers pains....

We have now heard several pronouncements that the Reserve Bank of India RBI wants greater transparency in the manner in which the benchmark rates PLRs or prime lending rates of banks are set. According to reports,another committee is being set up to examine this vexed issue. This,of course,is of very little comfort to millions of existing home loan customers who find themselves paying higher interest rates to their lenders while watching the same lenders woo new consumers with single-digit interest rates see box on how lenders accomplish this.

Lenders,on their part,argue that unlike new borrowers who are funded out of new low-cost deposits,their existing borrowers were funded out of earlier higher-cost deposits. Hence,they say,it will take time before the benefit of lower cost of deposits can be passed on to existing borrowers. There is some merit in this argument,but there is also an element of duplicity involved. Lenders should not be allowed to take advantage of this argument because they did not apply the same rules when deposit costs were rising. In that scenario,only the new borrowers should have paid a higher rate immediately and not existing borrowers. With one sole exception,I am not aware of a single occasion when lenders increased rates for new borrowers without also hiking them for existing borrowers.

The panacea

Clearly,no simple solution to this issue exists. However,a few things can be done immediately to bring a modicum of transparency and fairness to home loans in the interim period before the committee comes out with its report. First,it should be made mandatory for banks to display the movement of their Benchmark Prime Lending Rate BPLR or any other reference rate to which a loan or deposit rate is linked right from the inception of that rate. This will ensure that customers come to know of any movement in the reference rate of a particular bank,especially during times when interest rates are falling.

Second,it should be made mandatory to publish the spread data see box for what spread means for all loans made in a particular quarter for at least the last eight quarters.

Third,the regulator should come out with guidelines to ensure that the consumer can transfer his loan to another lender easily if he is not satisfied with the rates charged by his existing lender. Currently,the existing lender manages to create a lot of hurdles to prevent good customers from transferring their loans to another lender from whom they can get a better deal. To ensure that the process of transfer is smooth,the regulations must make a few things mandatory. Lenders must be required to provide a letter in a prescribed format to the prospective new lender laying down the following: one,the amount payable on which the loan will be treated as fully closed; two,the list of original documents held as security by the existing lender; and three,an undertaking that the existing lender will hand over all the original documents and a no-dues letter to the authorised representative of the new lender within a fixed number of days after receiving the payment.

These measures will go a long way towards improving transparency and fairness in home loans even as the new committee decides how to fix the reference rates used by banks in a more transparent manner. u

The author is chief executive officer,Apna Paisa. ceo

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