Home Loans – Sequel to Girlfriends and Wives tale
I think a lot has been written about how, in India, floating rates only mean that “interest rates” float upwards when general interest rates rise but stubbornly refuse to fall when the general interest rates fall. As a result existing home loan customers (“the wife”) pay a far higher rate for the same loan as compared to new customers (“the girlfriend”). The current new customer, in turn, becomes an old customer and suffers the same fate. See my article “Of Wives and Girlfriends” (http://www.apnapaisa.com/loan/home-loan-india/On_wives_and_girl_friends.html )
This unending cycle of unfair treatment to Wives …oops existing home loan customers has been officially recognized by many committees and many earnest words have been expressed by the committee as well as the regulators but the practice has continued unhindered. Even the Base Rate mechanism evolved by RBI to solve this problem has been proven to be ineffective with some creative foreign banks increasing the spreads over the Base rate for old customers. So far this abuse of the spirit of this regulation has been limited to a couple of foreign banks but if left unchecked the other banks may not stay far behind.
The latest sequel to this story has been added by the NHB circular dated October 19, 2011 “advising” housing finance companies to “apply uniform rates of interest to the old and new borrowers who have the same credit/risk profile”. Unfortunately, unless supplemented by further action, this is likely to remain an “advise’ that the housing finance companies will ignore. “This looks like a PR exercise by NHB to look good to the public” said a respected industry veteran when I asked him about his reaction to the circular.
He may not be far wrong because if the regulator was serious about implementing this directive it would not have couched it as an advisory and that too with an escape hatch like” same credit/risk profile”. If the regulator was serious about implementing this directive all that it needs to do is to call for data about the current interest rates being paid by consumers segmented by the month in which the loan started and it will become clear that people who took loans prior to June 2009 are paying significantly higher interest rates as compared to those who took it thereafter.
I have written about this many times but ensuring fair treatment to existing home loan customers is possible without heavy handed regulation. All that the regulators need to do is:
a. Ensure that prepayment charges are abolished (NHB has already done that and hopefully RBI will follow suit)
b. Make sure that a standardized and suitable loan transfer mechanism is agreed upon by all lenders (banks as well as Housing finance companies). This will ensure that non-financial barriers are not created while transferring loans from one entity to another.
c. Make sure that regulation on both above is followed at the risk of penal consequences
Of course this will only ensure that alert customers are easily able to get the benefits of new rates. This will still leave untouched the vast majority of customers who are blissfully unaware of the interest rates they are paying on their home loans. But perhaps the regulations to benefit them can follow in due course.
Like the modern film makers, the regulators may provide regulation in doses so that there can be many more sequels to this story while the lenders adjust to the new ground realities.