Last week I received new year greetings from the chief executive officer of a large private bank. “Wishing a very happy and prosperous new year,” the one-page letter promised that the bank would “strive to serve” me better and “grow our relationship”. For the past few years I have also been getting text messages and emails from banks and other financial intermediaries on my birthday. As a consumer, you feel good when you find banks, insurance firms and asset management companies joining your family, friends and colleagues to wish you on your birthday. Does this mean that finally banks have started caring for customers? If the recent meeting that the industry lobby Indian Banks’ Association had with the Reserve Bank of India (RBI) brass on home loans is any indication, these changes are cosmetic. Senior bankers attending the meeting took pains to explain why they cannot offer real benefits to their floating rate home loan customers.
Also Read Tamal Bandyopadhyay’s earlier columns
There are two types of home loans—fixed and floating rate loans. Normally, fixed rate loans cost higher than floating rate loans. Since the average tenure of a home loan is about 15 years and banks do not have long-term resources, they take an interest rate risk while lending long and hence charge higher rates. The floating rate loan costs less as the price of the loan is theoretically linked to a benchmark rate that changes in accordance with the cost of borrowing. So, when the benchmark rate goes down, the cost of a floating rate home loan should decline.
But that has not been happening. Indian banks and housing finance firms are devising various schemes to offer lower interest rates to new home loan seekers without changing the benchmark rate and existing floating rate home loan customers are not getting the benefit. And, when a frustrated floating rate home loan borrower wants to prepay her loan, banks are charging her a prepayment penalty.
Existing bank customers want the benefit of low rates that new home loan borrowers are enjoying. And, if the banks are not willing to give them that benefit, they want to prepay their loans without any penalty as this enables an existing customer of one bank to refinance the loan by taking a fresh loan from another bank at a cheaper rate.
The banking ombudsman in Delhi recently ruled in favour of a few home loan borrowers against two banks. These borrowers had not received the benefit of a floating rate on loans they had taken. Apparently, they wanted to prepay their loans, but the banks did not allow them to do so without a prepayment penalty. Now, being directed by the ombudsman, both the banks have waived the penalty on prepayment of loans. To a few other existing borrowers who complained, they have extended the benefit of a lower interest rate being offered to new borrowers.
Had the banks not done so and contested the ombudsman’s decision, the customers would have probably moved the central bank for justice. And had the central bank seen merit in their argument, it could have taken a class action. In other words, these cases could have been cited as precedents and all floating-rate home loan consumers would have got the benefit. But this has not been the case as banks were quick to settle disputes with consumers. At the meeting with RBI, senior bankers tried to explain why existing customers cannot get the benefit that the new customers are offered. The regulator, I am told, is not convinced.
Meanwhile, the Competition Commission of India, too, is looking closely at this issue. The commission’s objective is to promote competition in the markets, prevent practices that have adverse effect on competition; and protect the interests of consumers.
Indian banks have become more robust, efficient and profitable in the past decade, but they are still reluctant to treat customers with transparency and respect. All of them have embraced technology in a big way, but that has neither brought down the cost of transactions for customers nor has it raised the level of convenience dramatically.
Data from the banking ombudsman’s offices show that the number of complaints (excluding credit card related ones) per one million bank accounts rose from 75 in 2007 to 245 in 2009. The latest data are not available. In 2009, public sector banks recorded 165 complaints per one million accounts; the comparable figure for new private banks is 406 and foreign banks 851. One must remember that most complaints are recorded in urban India where the consumers are more aware of their rights than their counterparts in rural India. In 2009, urban India accounted for about 78% of banking business.
One interesting aspect of a bank’s relationship with its consumers is that the onus of doing things right is always on the consumers. If they falter, they are penalized. But banks don’t bother much about keeping their commitments. For instance, if a cheque bounces (not for keeping insufficient funds in one’s account, but some other reasons such as getting the date wrong or a discrepancy between the amount written in figures and words) or money kept in an account drops below a particular level, customers are penalized. But if a bank’s ATM is not functioning or a branch is not able to update one’s account because its server is down or even a cheque dropped in a credit card payment box kept in a branch cannot be traced, banks never compensate their customers for the time wasted in looking for another ATM, visiting the branch on another day for updating accounts or chasing the missing cheque. New year greetings are welcome, but it’s time banks do more than pay lip service.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email your comments to email@example.com