Home loan spreads are a grey area for customers

RBI says these should be ‘usually constant’; loan documents are vague on this issue, but banks reserve the power to change.

Chartered accountant Saurabh Das (name changed on request) was not very surprised when his floating home loan rate was changed by his lender, a foreign bank. He had been expecting it for some time. However, what was surprising was the change in spread, a significant 75 basis points (bps).

"The rate rise was expected because of the Reserve Bank of India's constant hikes, but why the change in spread?," questions Das, adding the base rate changed by 100 bps between November and April, from 7.25 to 8.25 per cent. But the effective loan rate increased from 8.25 to 10 per cent, a rise of 175 bps in six months. Keeping the same spread would have meant the loan rate should have been 9.25 per cent.
 

AN UNPREDICTABLE SPREAD

* Banks change the spread over the base rate for the customers

* Banks say this could be due to increase in the cost of funds or a liquidity crisis

* Typically, base rate changes every quarter, but the spread remains the same

* There are no regulations preventing the banks from changing the spreads

* RBI says spreads are ‘usually constant’; the loan documents don’t mention it

* Customers can knock the banking ombudsman’s door for grievance redressal

In the base rate regime (introduced last year), the floating rate of interest on housing loans are calculated by adding a pre-decided margin or spread to the bank's current base rate. Banks review their base rates every quarter.

Bankers are divided whether spreads should be changed midway or not. "Normally, the spread remains constant over the loan tenure and banks don't change the spread midway," says S Govindan, general manager, personal banking & operations, Union Bank of India. According to him, it could happen if the borrower has defaulted in payments.

Another public sector banker echoes these views, "Though most banks rarely opt for this, if a bank feels it is not getting the desired profit margin with the spread it is charging, it can change the spread for customers," says a senior public sector banker.

Spreads are typically decided when you take the loan. A number of factors go into deciding it. These include your credit profile, employer, income level, loan to salary ratio and so on. If any of these do not change drastically, the spread should be left unchanged.

Harsh Roongta, CEO, Apnapaisa.com, says often these changes may be done for extraneous reasons. "Banks will not give any reason for changing spreads because it does not amount to violating any regulations," he says.

Even the RBI's definition is ambiguous. An explanation of the structure of a floating rate of interest on RBI's website states, "While the index is a measure of interest rates generally based on, say, government security prices, the spread is an extra amount that the banker adds to cover credit risk, profit mark-up and so on. The amount of the spread may differ from one lender to another, but it is usually constant over the life of the loan." The catch: 'Usually constant.'

When asked, Standard Chartered refused to comment, saying this was competitive information which could not be shared, while saying they were following rules prescribed by RBI. E-mails to Citibank, Deustche Bank and Barclays did not elicit any response.

If you are left high and dry or can't make head or tail of why the loan rate has increased more than the change in the benchmark base rate, there is little you can do. The home loan document is equally vague on this issue. "The bank shall, from time to time, be entitled to change the rate of interest, depending on the changes in the base rate, and such revised rate of interest shall always be construed as agreed to be paid by the borrower(s) and hereby secured," says one such document.

Das approached the banking ombudsman and was able to get his loan rate reversed because the bank had not informed him about the change in spread, a technical mistake on the part of the bank. But he has been clearly told they can change it any time in the future.