If you took a home loan before 1 July, in all probability, you would be still on the non-transparent benchmark prime lending rate (BPLR) system. It was after that date that all banks shifted to the fairer base rate system.
About six months hence, the Reserve Bank of India (RBI) has extended the December-end deadline for banks to change the benchmark and methodology used in the computation of base rate to 30 June. If you borrowed after July, you would be automatically on the fairer base rate. However, those who borrowed before 30 June will have to go an extra mile to get their loans shifted. Only a handful of banks have taken efforts to get their older customers on the base rate system by sending them appropriate communication.
Also See Few Straight Answers (PDF)
Earlier, all loans were pegged to the non-transparent BPLR system. From 1 July, RBI gave way to a fairer base rate system, below which banks cannot lend.
RBI took the long-awaited step since the BPLR system gave banks room to use the rate to their advantage. When overall interest rates went up, banks were prompt to increase the BPLR, but the opposite would just not happen. Banks kept the BPLR high and allowed new customers to come in at lower rates, while existing customers felt cheated since it kept them captive at rates that were 2-5 percentage points higher than new customers. Exit loads in the form of pre-payment penalties ensured that the accounts stay captive.
With the base rate coming into play, all new home loan customers automatically enjoyed the benefits of the new system. So while the rights of new loan seekers have been protected, the same cannot be said for those who took home loans before July—they remain stuck to the unfair BPLR system.
Banks not shifting
Banks are in no rush to transfer existing BPLR customers to the base rate despite RBI saying that they should. The RBI circular says: “In case 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 (http://tinyurl.com/6eqxoyp).”
However, feedback from the street tells another story. While some banks refuse outright to shift old borrowers, others are convinced there is actually no difference between the two rates. Even to customers who want to shift, the banks’ response is that they have no notice from their headquarters to do so. Other banks quickly cite RBI’s six month’s extension as an excuse for slowing down the changeover to the base rate system.
Says K.V.S. Manian, group head-consumer banking, Kotak Mahindra Bank Ltd, “The six-month extension given by RBI is for banks to take a decision on the formula to calculate its base rate. It’s banks’ internal calculation. It has nothing to do with whether a customer should be allowed to shift to a base rate or not. As per the guideline, if the customer wants to shift, banks have to give him an option.”
We sent emails to 10 big banks asking if they allowed customers to shift from BPLR to base rate. Most emails went unanswered even after several reminders (see graph).
Why the reluctance: Says Harsh Roongta, CEO, Apnapaisa.com, “Why would a bank want to change customers from BPLR to base rate. It’s lot of work for banks.” Your existing loan is a contract which you have with your bank on certain terms and conditions, when you shift to a new system, you will have to make fresh documents/contract. That’s not it, all this has to be done free of cost for you. In fact, as per the RBI norms, banks are not allowed to charge any kind of switch-over fee.
Moreover, the shift from the older system to the new one has to be “on mutual agreed terms and conditions”, according to the RBI circular. So even if you want to shift and do not agree on terms and conditions that the banks offers, there will be problems in shifting. A senior official of another regulatory body, who did not want to be named, says, “Since the terms and conditions are to be decided mutually, banks will always have an upper hand. Does the customer really have a choice here?”
Complying banks: However, some banks have taken the initiative to voluntarily contact existing customers on the older system to change the base rate system.
An email response from Union Bank of India says, “Branches have been advised to send a communication to existing borrowers requesting them to change to the base rate system.”
What to do
Mint Money recommends that even if you haven’t received any such communication form your bank, it’s best to approach them and get shifted to a fairer system.
But what to do if the bank refuses to shift you? State Bank of India, in its email response says, “Existing customers have the right to get their loan accounts linked to base rate. In case of any banker’s refusal to accept the customer’s request for switch-over, the customer can lodge a complaint by either calling the concerned bank’s customer helpline number or writing to the bank’s customer grievance cell. If the reply is not received from the bank within a period of one month after the bank concerned has received the representation, or the bank rejects the complaint, or if the complainant is not satisfied with the reply given by the bank, one can file a complaint before the banking ombudsman.” For borrowers who do not want to take the pain of approaching a banking ombudsman, it’s best to switch the loan. Says Adhil Shelly, CEO and co-founder, BankBazaar.com, “There is no clear directive from the regulator on how to shift from BPLR to base rates. The easiest way to shift is to switch the loan to another bank. Look at the cost of the new loan and the cost of switching the loan. And move from a non-transparent system to a fairer system.”
History shows that banks are willing to hike BPLR every now and then, but never do the reverse. Any change in the base rate is applicable to all existing loans linked to this rate and that makes it non-transparent and non-discriminatory. So it makes sense for you to shift to the base rate. If your bank doesn’t allow you to do so, consider switching the bank.
Graphic by Yogesh Kumar/Mint