Of wives, girlfriends and home loans

“SBI drops home loan rate to 8%. Rate war expected,” screamed a Sunday morning headline.

The detailed interview mentioned that unlike the 9.25% package announced in December 2008, home loans at this rate would be available to existing home loan customers of other banks shifting their loans to SBI. “After all they are new customers as far as we are concerned,” the chairman of State Bank of India (SBI) was quoted as saying.

What about SBI’s own home loan customers? Well they will have to be satisfied with getting a new loan (which they may not need at all or may not be eligible for) equivalent to 10% of their existing loan amount at the new rates though on their existing loans they will continue to pay the old high rates, which are just a tad lower than the all-time highs reached in August 2008.

Clearly, the wife (existing loan consumer) and girlfriend (new consumer) syndrome is alive and kicking even for public sector banks (see article “Wives and Girlfriends” at http://www.apnaloan.com/home-loanindia/On_wives_and_girl_friends.html).

This is not to suggest that SBI or any other public sector bank is the worst offender in this respect. They clearly are not. In fact, quite a few private sector home loan lenders continue to charge their existing consumers at 13% or higher even while they have dropped rates to single digit (or low double digits) percentage for new consumers.

The disregard for existing consumers is all-pervasive and not a single player (whether public sector or private sector) can claim to have treated its existing consumers fairly whenever they have dropped interest rates for new consumers. In fact, whenever this issue is raised by the media, none of the lenders even bother to defend the practice given its completely indefensible nature.

So why does this continue? It’s because the consumers allow it to continue. Only a very few consumers take a little pain and research the market and get alternative offers to take over their home loan. They then call their existing lenders for a letter giving details of the loan amount outstanding and the amount required to be paid for making a full and final settlement of the loan amount to enable them to shift their home loan. If the consumer has been regular in paying his EMIs he is a prime customer and no bank likes to lose his business. In many cases therefore his existing lender agrees to match the interest rates that the consumer is getting from the new lender. Even if the existing lender does not do so the consumer still benefits by shifting his loan.

We get a lot of queries on this subject from existing home loan consumers asking us for the legal options available to them to compel the existing lenders to pass on the benefit of lower rates to them. Our answer is always the same. Economics can always trump law. Stop expecting the mai-baap sarkar to do everything for you. Vote with your feet. Go to the cheapest provider on your own. You do not need any legal help for this. If enough consumers do it the lenders will stop treating you like the proverbial 'wife'.
 
The RBI can also do a lot to ensure more transparency in this regard. The following suggestions do not require any change in the law but can help will introduce a level of transparency:

• They can make it mandatory for the lenders to disclose on their websites all the reference rates used by the lenders for pricing floating rate loans, including the history of movement of such reference rates in the past as well as the spreads (from minimum to maximum) from such reference rates charged from quarter to quarter after taking into account all loans sanctioned in that quarter. This will make it easier for consumers to decide on the past history of the lender in passing on the benefit of rate cuts to its existing consumers.
• Make it mandatory for the lender to specify the basis of fixation of the floating rate. This means the lender will have to specify which reference rate is being used and the spread from that rate. Surprisingly, there are quite a few home loan agreements where the interest rates are just mentioned as floating without mentioning the basis.
• A slightly more controversial suggestion is to force the lenders to use publicly determined reference rates such as the yield on government securities of a certain maturity instead of an opaque internally determined reference rate.
  In fact, the window to make this market more transparent is not a large one. Some smart politician is going to pick up this issue to make far more stringent rules as law. After all lenders don’t have votes, the loan consumers do. And now the loan consumers have reached a mass that justifies taking up of such issues by the politicians. While the regulator (or a politico) takes up this issue, the consumer should stop behaving like a martyr wife and threaten to become the girlfriend of another. That’s the only thing that will make their husbands (existing lenders) behave well towards them.