Better service, lower charges

Switching loans allowed, but timing it becomes crucial.

The Damodaran committee report on customer services in banks, among other things, suggests ways to address common grouses on shifting loans, minimum bank balance and parity in floating-rate home loans to customers.

Disparity between old and new home loan borrowers is the most talked about. Bankers say a section of home loan borrowers feel even with the same profile, new customers are getting better terms. R S Sangapure, general manger (retail banking), Central Bank of India, says: “A new customer has higher bargaining power, since there are multiple choices in the market that he/she can take a look at, if a bank does not agree to offer him something special.”
 

WHAT IT MAY MEAN
Expected impact if the Damodaran committee report is implemented

• Removing disparity between old and new customers
  LIKELY IMPACT: Higher rates for new customers 
• Lower foreclosure penalties
  LIKELY IMPACT: Easier to shift to banks offering attractive interest rates
• At least one shift of rate regime allowed
  LIKELY IMPACT: More flexibility but possibility of getting locked in at wrong rates
• Informing customers about breach in minimum balance requirement
  LIKELY IMPACT: Customers can avoid penalties
• No selling bundled products
  LIKELY IMPACT: Customised service for account holders

For example, if you had taken a benchmark prime lending rate (BPLR) loan in 2006-07, you would have got it at 8-8.50 per cent. Today, you would not be paying anything less than 13-14 per cent. If you plan to take a housing loan today, you will get it at around 11 per cent. Difference = 2-3 per cent.

But, this parity can be brought about only in customers who have borrowed against the same benchmark rate – base rate or PLR – or the same category of borrowers, says K V S Manian, group head (consumer banking), Kotak Mahindra Bank.

In spite of the shift, bankers say, it isn’t possible to offer a rate of 10 or 11 per cent to those who were paying 13 or 14 per cent. Therefore, though shifting to the base rate may not be helpful immediately, this is a transparent, market-linked rate in the long run and movement in the rate will be reflected in your interest rate more easily than BPLR, especially when the interest rates are coming down. Some bankers feel that to bring all customers on par, lenders might look at not offering special or lower rates to new borrowers.

Another sore point for customers is foreclosure charges. The committee report has said banks should not impose high penal charges for foreclosing home loans. Banks use penalty as a deterrent for borrowers who are looking to prepay, refinance or transfer balance.

At present, barring a few banks that have either done away with foreclosure penalties within a certain period, most charge between 2 per cent and 2.5 per cent as foreclosure penalty. For instance, HDFC Bank does not allow prepayments in the first six months, charges 1.5 per cent of the original loan amount for foreclosure between six months and five years and 0.75 per cent between 5 and 10 years. At the same time, Axis Bank and IDBI Bank do not levy any prepayment penalty.

The panel has also asked to allow customers to switch from fixed rate home loans to floating or vice versa, once in the loan tenure. Typically, this option is given only with special, short-duration schemes.

Typically, floating-rate customers prefer shifting to fixed rate when rates rise, and vice versa when rates fall. But, experts discourage taking up fixed rate because banks charge at least one per cent higher than the prevailing floating rate.

A senior banker says: “It is not possible for a customer to take an informed decision of shifting from fixed to floating rate or vice versa, as most of them aren’t interest-rate savvy. Second, getting locked in at a rate does not help, as it does not move with the market rate.” Therefore, bankers aren’t sure if customers will be able to use this flexibility to their advantage.

Further, banks are asked not to levy a penalty before warning customers on the breach of the minimum balance requirement. While public sector banks have lower minimum balance requirements (Rs 500), it could go as high as Rs 5,000 for private banks and up to Rs 25,000 for foreign banks.

Banks will also have to abstain from selling bundled products to customers. For example, banks sell life insurance and demat with savings bank account and may even charge for it. The long standing demand to increase the deposit insurance amount has also been considered, it is likely to go up to Rs 5 lakh from Rs 1 lakh at present.