Banks say NO to uniform home loan rate cut

The contentious issue of “uniform home loan rates for old & new customers” cropped up when CEOs of large banks recently met senior RBI officials to suggest possible measures that the central bank could consider for the January 29 monetary policy. At the meeting, RBI deputy governor KC Chakrabarty reprimanded bank chiefs over their inability to pass on the benefit of lower interest rates uniformly to all customers - including old customers. It should be remembered that this has been a common practice among lenders that while they are slow to pass on a rate cut, they are quick to hike either the loan term or the EMI when rates go up.

Bankers argued that since the incremental cost of fund had softened, they could charge lower rates only to new customers while old customers had to pay more as old funds were raised at a higher cost. Countering this, RBI said that reduction in incremental cost of funds also brings down the average cost of fund for a bank which should then be in a position to offer the new, lower lending rate to old as well as new borrowers. Some banks even said that offering the same rate to all customers could spark legal feuds since interest spreads (over or below the PLR) varied from customer to customer, each of whom sign separate loan contracts with banks.

Cheaper home loans to old customers not feasible: IBA

Amid a debate over teaser rates, bankers have turned down the RBI’s suggestion to extend the cheaper home loans to existing customers saying that the move will impact their bottom lines. The IBA said if banks offer lower rates to old customers as well, this will affect their earnings as it is not feasible for them to change their deposit rates accordingly to compensate this loss of interest arising from such a move.

Banks will not withdraw prepayment penalty on forclosure

Competition Commission of India (CCI), the apex body that operates to sustain and promote competition, recently sent notices to atleast 15 banks, NBFCs and IBA seeking explanation on why they penalise borrowers who choose to foreclose loans. Many of these institutions have already replied to CCI, to make it clear that the removal of prepayment penalty will result in higher lending risk and may cause asset-liability mismatch in banks.

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