The latest
in Reserve Bank of India’s measures to protect customers with home loans is a
proposal to change the way banks determine their `base rate’ – the benchmark
for all floating rate loans. The need for a re-look arose because customers
have been complaining of a raw deal in pricing.
In recent
years RBI has taken a number of measures to provide a better deal for home loan
borrowers. The introduction of base rate ensured that banks do not reduce rates
only for new customers by playing with the interest spread. In the past banks
could play with the spread as they would lend below the prime lending rate
(their earlier benchmark) for new customers while old customers continued to
pay over the PLR. This was not possible
with the `base rate’ which was also the floor rate for pricing. In June 2012
RBI forbade banks from imposing a penalty on pre-payment of home loans
irrespective of whether the loans were being refinanced or repaid. This made it
possible for disgruntled borrowers to move away to rivals if their loans were
not re-priced when interest rates were falling.
But there
are a number of areas RBI could look into as part of its consumer protection
initiative. Here are a few.
Compulsory Insurance: Banks have an interest in the
property mortgaged with them and they need to ensure that it is protected
against any eventuality. At the same time banks also gain by selling insurance
policies. But what need to be insured is
the cost of construction and not the cost of land. A 1000 square foot house may
cost Rs 2 crore in Mumbai but the cost of construction would be around Rs 20
lakh. So there is no need of buying property insurance for the whole loan
amount. Yet many banks insist that the buyer pay 15-year insurance premium
upfront based on the market value of the property rather than the construction
cost. Also in cities like Mumbai, the property is owned by the cooperative
society which is required to insure the property. It is therefore not clear
whether the bank’s insurance policy will pay a claim when the housing society
is also making a claim for the property damage.
Non-intimation of interest rate
changes: Most home loan borrowers focus on the
interest rate at the time of availing home loans. But floating rates
are dynamic and vary from time to time. The borrower is not aware of this because
while rates vary, the equated monthly installment or EMI does not. Banks merely
change the tenure of the loan. So in a rising interest rate regime it is not
unusual for borrowers to find that their principal loan amount is unchanged
even after years of repayment. Very
rarely does a bank communicate to the borrower changes in interest rates.
Notice of intimation of mortgage: In Maharashtra the government has
made it compulsory for all mortgage interests to be registered. This is aimed
at preventing fraudulent sale of the property even as a loan is
outstanding. While the objective is
laudable, the trouble is with the process. Although the law actually protects
the bank’s interest lenders have shifted the onus on the borrower. Rather than use their institutional clout to
facilitate smooth registration, borrowers are forced to approach agents and
spend a few thousands to complete this process.
No refinancing of existing loans:
Lenders often poach from home loan borrowers of other institutions. But
when it comes to their existing customer they do not offer them the benefit of
new rates. If there is a special scheme
running in the bank, existing borrowers are not informed of it. Also banks
charge customers a processing fee even when their loan is refinanced within by
their own bank but under a different scheme.
Complex pricing: Some banks have resorted to
complicating the pricing of home loans introducing interest free years in
middle of the tenure of the loan. Innovation in financial products is good only
as long as they do not obscure pricing. Borrowers need to have the opportunity
to compare the cost of one home loan against another. One way to make the pricing transparent is to
disclose the cost in the form of annualised yield to the lender based on
prevailing rates.
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