When will Acche Din come for the old or existing home loan borrowers? This question seems to be playing on the mind of every borrower since about a decade. For, while almost the entire nation tends to benefit from the rate cuts by the RBI, the case is entirely different for the existing borrowers of home loans. Like the hapless son who has been ousted from his father’s house, they keep waiting for their legitimate rights which are perhaps never given to them unless demanded and fought for.
It is not that in a falling interest rate scenario, lending rates are not cut by banks and housing finance companies (HFCs). They definitely get slashed, but only for new borrowers, while the existing borrowers keep waiting for their turn which never comes. Existing borrowers are the worst hit even in a rising interest rate scenario when banks hike rates at the drop of a hat.
Sample this: For buying a Rs16-lakh flat in NCR in 2004, Santosh Verma (name changed) had taken a 20-year housing loan of Rs 14 lakh at 7.5% interest from a private bank. However, just after a year or two, the interest rates started rising and reached to around 14% in 2008 or 2009. Similarly, the EMI also gradually increased from Rs 11,278 to Rs 17,409. Apart from the EMI, the loan tenure also increased by a few years as the bank had kept the EMI constant in the initial years of the rate rise. Worse, the EMI and interest rate of 14% remained the same even after the RBI cut rates significantly. In a year or two, home loans for new borrowers were available at 10 to 10.5%, but there was no respite for old borrowers. Having got perturbed with this, Verma switched to a public sector bank in 2011 at 10.5% interest rate. However, while the home loan rates are hovering around 8.5% currently, he is paying 11.45% interest and is now again planning to change his lender if the current lender refuses to bring Verma’s loan rate at par with the current market rate, for which they will charge him a fee also.
Now the question is: If the rates can go up in a rising interest rate scenario without discriminating between the new and existing borrowers, why don’t they come down also for both types of borrowers when banks start cutting rates? Also, when banks don’t pay any fee to the borrowers when rates are increased, why should the borrowers pay any fee to the banks for getting their rates lowered? Banks sometimes say that they are unable to lower their rates as their cost of funds is still high. If that is the case, then how are they able to reduce the rates for new borrowers? If this is not an unfair trade practice, then what is it?
Even industry experts admit that reluctance of banks to reduce home loan rates in accordance with the falling interest rates in the economy is truly very unethical and unfortunate. “The reason is that nearly all banks are struggling with bad assets. These non-performing assets (NPAs) are creating a huge dent on the balance sheets of banks. To provide for these bad loans, banks need to shore up their profitability. And what better way than to increase their spreads on home loans?” asks Ashish Kapur, CEO, Invest Shoppe.
Home loans, in fact, are inherently very secure and default on them is very rare. Hence by conventional banking norms, the spread on these loans should be the bare minimum. Therefore, when interest rates fall, banks have no reason for not passing on the benefits to this class of borrowers. Sadly, however, “while other regulators like SEBI and IRDA continuously monitor and regulate the fees, commissions and other charges imposed by service providers, the RBI does not assert itself on banks when it comes to regulating their service charges. So, while investors and insurance buyers are protected aggressively by SEBI and IRDA, home loan buyers enjoy no such security from the RBI,” says Kapur.
Abhinav Angirish, CEO, Abchlor Investment Advisors Pvt Ltd, is also of similar opinion. He says, “In a falling interest rate scenario, it is indeed a grievance for the existing borrowers as new borrowers tend to get lower rates. Besides, there are so many terminologies which borrowers don’t understand. For example, earlier rates were decided on the basis of PLR (Prime Lending Rate) of the bank. To bridge the gap between new and old borrowers, the RBI introduced MCLR (Marginal Cost Based Lending Rate) effective April 2016. MCLR helps faster adjustments of rates across all clients linked to MCLR.”
However, MCLR varies across banks and tenures depending on the cost of funds for the bank. For instance, SBI primarily has a spread of .25-.35 over 1-year MCLR rate of 8%. The spread changes with the risk associated with borrower too. Hence, “if borrower ‘A’ works for a Cat A company he would get a cheaper loan than a business owner (B) as the bank feels comfortable about the stability of income between A over B. On the other side, private banks are also aggressive and to be competitive could offer 6 months MCLR-based loan. This means that the rate adjustment would happen every six months compared to 1 year at SBI,” explains Angirish.
Here is how it works. Presume a borrower has borrowed in April 2013 when he was linked to PLR and has not bothered to check his variance/spread offered at the time of loan application. PLR of 10% with 2.5% spread would mean that the borrower pays 12.5% interest on his loan. With every change in PLR, his rate would be 2.5% over the PLR. PLR would be with immediate effect when the bank adjusts the rates. MCLR, on the other hand, works differently. It would be effective the period on which it has been agreed upon. In the example above, SBI would adjust it once in a year. If a borrower has borrowed in April 2016 when MCLR was around 9.25%, his effective borrowing was about 9.50%.
Post demonetisation, excess liquidity caused the banks to keep reducing rates faster. MCLR fell from 9.25% to as low as 8%. “If someone has borrowed in Jan 2017, his rate was naturally 8.25%. The old borrower’s rate would be adjusted in April 2017 connected with the new MCLR. If rates fell further, it could be that his rate is now better that the borrower of Jan 2017. Note, this works inversely in a rising rate scenario wherein new borrowers would pay a higher rate than the old borrower,” says Angirish.
It is clear, thus, that both PLR and MCLR systems work differently. However, as MCLR is more transparent, those still on PLR and paying higher interest rates may think of switching to MCLR at the current rate or moving to another lender, but even this is not that easy.
“In a falling interest rate scenario, although refinancing seems to be the only solution, but this can be a cumbersome process and one should calculate the overall cost saving after taking into account processing and other charges,” say experts.
Besides, this query also needs to answered that how many times one is required to change one’s lender just to lower one’s rate? The fact is that if the lenders have their way, then they may be able to discover some loopholes in the MCLR system also and borrowers won’t be able to do anything