Recently, State Bank of India (SBI) and ICICI Bank Ltd announced that they are waiving prepayment charges on floating rate home loans. Axis Bank Ltd anyway did not have prepayment charges on floating rate home loans for some time now. This would seem to suggest that all floating rate loans have no exit charges now. But unfortunately things are not exactly as they seem.
We know that the National Housing Bank (NHB) had stolen a march over its parent the Reserve Bank of India (RBI) in passing a regulation that prepayment penalty cannot be charged by housing finance companies (HFCs) in case of loans that are on a floating interest rate basis irrespective of the source of such repayment (even if it is by way of transfer of loan to another lender). Since more than 95% borrowers have taken home loans on floating rate basis, this will have a beneficial impact on all home loan consumers who have taken loans from HFCs (such as HDFC Ltd, LIC Housing Finance Ltd and Dewan Housing Finance Ltd). This will be especially useful for people who have taken these loans from these entities before 2010 who are paying interest rates as high as 14% even though new customers with similar profiles are charged 10.50-11.25% by the same lenders.
But unlike the HFCs in which NHB has mandated that prepayment charges cannot be levied on floating rate home loans (irrespective of the source of such repayment), RBI, which regulates banks, is reluctant to issue such a regulation. RBI is instead leaning on the banks and nudging the industry association Indian Banks’ Association to get an industry consensus on this matter. SBI (for all floating rate loans) and Axis Bank (for floating rate home loans only) had already moved to a no-prepayment charge regime even before RBI started leaning in favour of abolishing prepayment charges. So far, the only result from RBI’s behind-the-scene pressure has been on ICICI Bank which announced that it will not charge prepayment charges on floating rate home loans. Of course, with ICICI Bank coming on board (in addition to HDFC, SBI and LIC Housing Finance) it covers more than 70% of all outstanding home loans.
For those who came in late, it is common practice in India for existing floating rate loan customers to pay interest rates far in excess of the rates paid by the new customers with similar risk profiles and for similar loans from the same bank. This has become the most significant consumer grievance and the pre-payment charges only create an exit barrier for consumers to shift their loans to another lender who is willing to provide the loan for a much lower rate. While various devices such as the base rate mechanism are being tested to instill some degree of equality in treatment of existing consumers with new consumers, there is now regulatory consensus that the exit barriers in terms of prepayment charges payable to the existing lender needs to be removed.
The impact of not having an official regulation on prepayment charges is twofold. Firstly, it has so far had no impact on other public, private and foreign banks whose consumers continue to pay a prepayment penalty when they shift their loan to another bank.
Secondly, the concession continues to be narrowly targeted on only home loan consumers. ICICI Bank and Axis Bank for example continue to charge a prepayment penalty on floating rate car loans, loan against property among others. Obviously, if the prepayment penalty is unfair for home loan consumers the same logic applies equally to other floating rate loans as well. How could they escape regulator’s attention?
To sum it up, the impact of not having a regulatory framework for this requirement on which all lenders have shown reluctance only means that while a majority of consumers may get the benefit, other consumers who are either with the smaller banks or on other loan products will continue to suffer from the unfair treatment of existing consumers.
I think RBI has given more than enough time to the industry to come up with this on their own and in the face of the reluctance shown by remaining lenders, it will be forced to bring in an enforceable regulation in this regard sooner rather than later.
Harsh Roongta is CEO, Apnapaisa.com
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