A fair system is one where a borrower who opts for a floating interest loan would pay more when interest rates rise and gets the benefit of a reduction in rates automatically. In India, lenders quickly hike interest rates by increasing the repayment tenure as soon as interest rates inch up, but are happy to fleece the hapless borrower when rates fall. What is shocking is that the difference in interest charged can be as high as 5%.
Consider the case of Satyam Savla, who took a floating rate loan from HDFC Bank in 2007. It was to be repaid in 108 equated monthly instalments (EMIs). His interest rate zoomed to as much as 17.3% by 2010-11. This was almost as high as the rate applicable to unsecured loans at that time, he says.
But, in 2010, the Reserve Bank of India (RBI) changed its rules and issued a notification through its master circular to say that, after 1 June 2010, banks would switch borrowers from the benchmark prime lending rate (BPLR) system applied to floating rate loans, to the base rate calculation, and reset interest accordingly, after obtaining consent from the concerned borrowers. The circular directed bank boards to frame appropriate policies and an “option had to be given to existing borrowers to switch on mutually agreed terms.”
However, Mr Savla says that HDFC Bank did not bother to inform him and he was clueless about the highly beneficial change. It was only in September 2012 that he learnt that he was entitled to a lower rate and sought a reset. The interest rate on his loan was then revised sharply downwards to 12.3%, in November 2012. But what about the intervening period (between June 2010 and November 2012) when the Bank had collected excess interest of over Rs6.4 lakh from him?
In 2016, he realised that the Bank had extracted a higher interest by simply increasing his repayment tenure to 122 EMIs. These were subsequently reduced to 114 in 2012, when the interest rate was reset at his request. Since then, he has written innumerable letters to the Bank and to its managing director, Aditya Puri, to no avail.
Mr Savla then filed a complaint with the banking ombudsman (BO), but this was also rejected and the case was closed.
Why did this happen? We learn from Dr KC Chakrabarty, former deputy governor of RBI, that the issue goes back to 2008, when the finance ministry permitted discriminatory treatment of different classes of borrowers, by allowing banks to offer lower rates to new customers.
In 2010, after a hue and cry from borrowers, RBI asked banks to reset loans, but its own circular mischievously ensured that borrowers got a raw deal. Its master circular says: “Existing loans based on the BPLR system may run till their maturity. In case the existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any fee for such switch-over.”
Why on earth would RBI draft such a flawed circular with an open-ended clause that allowed existing floating rate loans to ‘run to maturity’ unless borrowers asked for a switch? Why didn’t the banking regulator ensure uniform benefits to all borrowers? Only to benefit banks. It is possible that some banks did inform borrowers about the change. It is also likely that many borrowers made inquiries after reading media reports. Government banks do an annual review and may reset rates. But, clearly, each bank does what it wants to. During Dr Chakrabarty’s tenure, a complaint to the BO often helped the customer. But that, too, does not seem to work anymore, going by Mr Savla’s experience.
Mr Savla insists that HDFC Bank did not inform him of the change to base rate. Here is what happened with his complaint to the BO. The Bank Ombudsman’s order says that, after seeking information from the Bank, it is convinced that the change in rate of interest was communicated to Mr Savla by SMS and post and “after following the due procedure of communication the same was implemented by the Bank.” Amusingly, the Bank apparently pointed out that “Information regarding the Base Rate was displayed on their Website and on the notice board of all the Branches as per the Bank Board approved policy.” Did the BO ask HDFC Bank to produce proof of how it had intimated the change in policy to Mr Savla? Was it the SMS produced? We don’t know. Unfortunately, discrimination against borrowers is officially sanctioned and it will not change without determined and concerted and collective protests by those who are affected.
Is the BO correct in its interpretation? Well, consider the rules applicable to credit cards which were also framed only after usurious charges levied on customers led to an uproar. In the case of credit cards, it is mandatory for banks to explain relevant terms and conditions such as fees, charges and applicable interest rates, billing and payment, method of computation of over-dues and renewal and termination procedures. But that is not all. Banks are also required to, separately, give a copy of the Most Important Terms and Conditions applicable to the credit card at the time of application.
Why shouldn’t similar, non-discriminatory rules apply to mortgage, where the borrowings are significantly larger? A proactive BO would have taken a holistic approach, instead of looking at whether certain boxes were checked. And a fair regulator would have ensured that borrowers get just and non-discriminatory treatment through its regulations. This brings us to The Charter of Customer Rights issued by RBI on 3 December 2014, under its rock-star governor Raghuram Rajan. In 2017, the Charter remains a meaningless motherhood statement that is unoperational. Moneylife Foundation has recently written to governor Urjit Patel, pleading that the Charter be given more teeth. We are awaiting a response. The Charter recognises five basic rights of bank customers: right to fair treatment; right to transparency, fair and honest dealing; right to suitability; right to privacy; and right to grievance redress and compensation. Here, too, we learn that the right to fair treatment included non-discriminatory treatment between borrowers; but this was dropped under pressure from banks.
A simple reading of Mr Savla’s case shows that the first, second, third and fifth rights have been violated by HDFC Bank if its so-called communication to Mr Savla did not reach him. Mr Savla’s next option is to go to court. But, as the Bank knows, it is likely to cost him more than the extra interest he paid.
After 1 April 2016, RBI has changed the rules, again without any discussion with borrowers and allowed banks to link loans to their marginal cost of funds based lending rate (MCLR). They have the freedom to lend at MCLR or insist on a mark-up. Most ordinary borrowers are clueless about this, or how the loans are reset, now that interest rates have dropped. Worse, banks are allowed to reset rates only once a year, which means that they do not have to pass on the benefit immediately. This is again discriminatory to borrowers, especially when financial literacy is abysmal.
RBI’s treatment of borrowers, based on one-sided contracts, would probably be struck down by a court of law as unconscionable or as one-sided contracts. The question is, who will bell the cat? Please write to Moneylife Foundation at email@example.com
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