Lower rates for old borrowers too: RBI

Raps banks for teaser loans; banks’ body yet to respond.

The Reserve Bank of India (RBI) has come down heavily on banks for lack of transparency on retail loan pricing and asked them why the benefit of a lower interest rate hasn’t been passed to existing borrowers.

In a letter issued by RBI’s customer service department to the Indian Banks’ Association last month, the central bank raised issues such as discriminatory pricing by banks for old and new customers and also raised concerns over teaser rates. The IBA is yet to revert on the issue. An executive said the matter would be taken up during the next management committee meeting.

“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?” asked a senior RBI official.

RBI went to the extent of saying such discriminatory practices are against the principle of basic banking as a utility.

In recent weeks, RBI deputy governors Usha Thorat and K C Chakrabarty have publicly expressed 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.

While banks played down the letter, saying it was written before the third quarter monetary policy review, they said it was not possible to lower rates for existing borrowers, since the loans were disbursed when the cost of funds was higher.

Banks had earlier also said they were unable to cut floating rates for existing customers because their liabilities are short term, with tenure of three to five years. However, the regulator has rubbished the argument.

“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.

As for teaser rates, the source said banks were informing borrowers about the instalment for the initial two or three years, when interest rates would remain fixed.

“For the remaining 18 years, nobody knows what the EMI (equated monthly instalment) 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,” the official said. RBI wanted to know if banks had worked out the cash flow levels when interest rates rose.

Last year, State Bank of India pioneered the concept of teaser rates by offering a home loan product which had both a fixed and floating rate character. The product became hugely popular and forced others to follow.

An SBI executive said the bank had not lowered the eligibility conditions and was clearly stating the EMI and other terms to borrowers.