When the credit policy announced a surprise 0.50% reduction in Repo rates, I had blogged that it will be a while before loan rates will go down and even then Base Rates may not change but only spreads may be reduced (which means only new consumers would benefit rather than existing ones).
Even as I write this, I have already been proven half wrong and half right. Big daddy SBI has not reduced Base rates but has reduced spreads on a number of loans including an aggressive 0.75% cut in car loan spreads. This will benefit only new customers of SBI and not its existing customers since Base rates have not been cut. In other cases though we have seen cuts in Base rates ranging from 0.10 % ( United Bank of India, Bank of Maharashtra, Vijaya Bank and Corporation Bank) to 0.25% (ICICI Bank, IDBI Bank, PNB, Syndicate Bank, Kotak Mahindra Bank, Allahabad Bank, Bank of Baroda and UCO Bank) as against the 0.50% cut in Repo rates.
So all the existing loan customers of these banks will benefit as their floating rate loans will come down. In a surprising step, ICICI Bank has increased spread for new customers which means unlike in the past, old ICICI customers will benefit whereas the new customers will not. This is probably a historic event.
It also shows that all the media exposure is working and existing loan consumers have woken from their slumber to demand lower rates or aggressively shifting their loans to other banks forcing banks to start giving them some benefits as well to retain their business. However even after these rate cuts old consumers will still be paying anywhere between 0.25% to 4% more than new customers of the same bank. The biggest sufferers are those who had taken the so called “teaser rate loans” in 2009 and early 2010 most of whom have now begun to pay anywhere between 11.00% to 11.75% after the fixed teaser period is over. Unfortunately for them National Housing Bank (which governs housing finance companies such HDFC, LIC Housing Finance etc.) has issued a clarification that pre-payment charges will be payable on such loans if they are shifted to another lender even though they are now floating. It is also not clear whether RBI’s proposed guidelines prohibiting charging of pre-payment charges on floating rate loans will cover teaser rate loans after the fixed rate period is over and they become floating rate loans.
In any case as I have said on numerous occasions in the past the difference in rates is so high you can pay the pre-payment charges and still benefit. A lot of banks will offer to fund not just your existing loan but also the pre-payment charge payable to the new lender and still give you a lower EMI. The processing fee is nominal to zero if you are a good credit worthy consumer. So here is a case where you pay nothing from your pocket for shifting the loan and yet your EMI comes down. You don’t need to do complicated calculations to understand that this is beneficial for you. But before you shift, give a chance to your existing lender to shift you to a floating rate of 10.50% - 10.75% even if it means paying a small fee of around 0.56% or so. It will save you the hassle of transferring documents from one bank to another. And for god’s sake don’t shift to the so called Dual rate loans (where the rate remains fixed for a couple of years) as you will not get the benefit of any downward revision in interest rates that is likely in the near future as also might make you ineligible for a zero pre-payment charge regime.
In a heartening sign, the RBI Governor has said in a TV interview that a Committee is looking into widespread complaints that the banking sector overcharges existing customers while giving lower rates to new customers with the same risk profile. Here is a small suggestion that the Committee can consider. The banks should be required to rate all consumers in a pre-specified band (let’s say A, B and C). They must be required to provide details of the spread for various kinds of loans for all the rating bands on their websites including any changes made from time to time. The banks should let the consumer know which rate bands he falls in and hence he will be able to calculate the spread that he is entitled to get from the bank. If the bank decides to down grade the consumer’s rate band (and hence increase the spread for him) he should be notified so that he can decide whether he wants to shift his loan (there are no pre-payment charges in any case).
This kind of regime will help old consumers get the same rates as new consumers with same risk profile and at the same time allow the banks to price their loans based on risk perception of the consumer.
ApnaPaisa helps Indian consumers take informed decisions like: Which home loan is best for me? Do I need life insurance? Author can be reached at www.facebook.com/apnapaisa
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