Mr. Harsh Roongta, Apnapaisa.com
The Reserve Bank of India (RBI) recently extended the ban on charging
of prepayment charges from home loans to all floating rate loans given to
individuals. However, this position could be reversed if the recommendations of
the working group set up "to examine the issues related to discrimination
in pricing of credit and recommend measures for transparent and appropriate
pricing of credit under a floating rate regime" are accepted.
Unfortunately, their recommendations, if implemented, are unlikely to
result in a fairer regime. In fact the recommendation, if accepted, might lead
to a more unfair regime.
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| Harsh Roongta, Apnapaisa.com |
This is surprising, since they have taken a tough stance on
'discrimination' as defined by them, even though it is a non-issue, while
'differentiation' (the raison d'être for the group) has been described by it as
inevitable.
The group's recommendation virtually justifies 'differentiation' by
accepting the same arguments that the banks have provided so far. The average
cost of funds drops slowly as interest rates drop because bank depositors finish
the term of their deposits at the higher rate and only fresh deposits are at a
lower rate and, hence, the benefit can be passed on only slowly.
On the other hand, it argues when interest rates rise, depositors
have an option to prematurely close their deposits and redeposit back at a
higher rate. Thus, when interest rates rise, the bank's average cost of funds
rise quickly and need to be passed on quicker to all consumers.
While this sounds logical, no evidence is adduced to counter the
widely held belief that few Indian fixed deposit holders break their deposits
to take advantage of higher rates. If not too many fixed deposit (FD) holders
are breaking their fixed deposits to take advantage of higher rates then
clearly the 'base rate' at best should move upwards just a tad faster than it
moves downwards.
In fact, doubts about the fairness about this downward stickiness
will reduce if the calculations of base rate are made transparently available
to the public through the banks website. The base rate is allowed "…. to
use any methodology as considered appropriate, provided it is
consistent.."
Public scrutiny will ensure that the banks are indeed following a
consistent methodology while calculating their base rates and reduce the
widespread public dissatisfaction that is currently prevalent on this issue. I
am willing to place a reasonable wager that if base rate calculations are made
transparent we will find them almost as sticky on the upward side as they are
on the downward side today.
Another recommendation bats for re-introducing the exit penalty as on
option for a cheaper floating rate loan. Again, this recommendations sounds
good on paper (cheaper rate if you accept prepayment penalty and higher rate if
you want nil prepayment penalty) but given the manner in which consumer facing
regulations are practised in India, it is most likely to be mis-used and
mis-sold.
When the benchmark rate cannot be fixed transparently, the least that
the consumer can be given is a costless (and painless) exit ability. The
central bank must stick to its current stand disallowing any prepayment charges
on floating rate loans to individuals.
The next recommendation is about IBA "evolving a set of
guidelines for easier & quicker transfer of loans particularly mortgage /
housing loans".
This provides for a mechanism in which the old lender can share
know-your-customer (KYC) documents of the borrower with the new lender. That is
a meaningless recommendation since the borrower can easily provide the KYC
documents.
What the mechanism needs to do is provide for an IBA-approved
mechanism for transfer of security documents directly from the old to the new
lender, making the transfer process 'painless' for the consumer. This is the
biggest issue faced by consumers and the new lender while transferring loans
from one lender to another. Making the transfer process painless (it is already
costless) will go a long way in ensuring the interest rates charged are fair,
even if the regulations themselves do not provide a transparent basis for
calculating the benchmark rate.
There are quite a few extremely useful recommendations on non
increase of spreads, fixed reset dates, sunset clause on existing BPLR loans,
standardisations, uniform disclosure of rates and charges, etc, which should be
implemented as quickly as possible.
But, real transparency will be possible only if fixation of base
rates is made more transparent and exit is made "painless" and
remains 'costless'.
About the author..
The writer is Mr. Harsh Roongta, CEO, Apnapaisa.com
http://in.linkedin.com/in/harshroongta
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