THE "NOT SO FLOATING" FLOATING RATE LOANS

I am writing about an issue that a large number of people who have borrowed from various banks over the last few years are facing today. This is also borne out by my own experience. Back in the years 2004-2006 when liquidity was ample most private sector and foreign banks lured investors into borrowing from them by offering very low housing loan rates ( as low as 7%) under the guise of floating rate loans. This was also the phenomenon in other segments of consumer loans. The meaning of floating rate loans as I understand is that it has to follow the cycle of interest rate cuts and increases by the central bank (maybe with a lag).
However consumers have been taken for a big ride in this regard by a vast majority of banks with regards to (apparently) floating loans. At the time of sanction and disbursal of these loans most consumers (including me) believed that interest rate cycles will be properly followed in resetting these loans. When the Indian economy was doing very well and there was a global boom in order to control excesses and keep inflationary expectations under control RBI continuously tightened its policy till the third quarter of 2008.As it turns out most banks kept on increasing their PLR’s (Prime Lending Rates) when RBI increased its overnight REPO rates and CRR (Cash Reserve Ratio). However they have been extremely slow in reducing the same when the RBI has cut the REPO rate by 4.25 percent over the last 8 months and has also reduced CRR by nearly 5%. RBI’s measures have pumped in nearly Rs 3,00,000 crores into the Indian economy.
Even as this has been done most of the banks have been following a policy where they have been announcing lower rates for new customers but not for older ones who have been with them for several years.
This brings into question the BPLR (Below Prime Lending Rates) of the banks which has also been raised in the latest policy review by the RBI. This effectively gives the banks the leeway of doing whatever they want with their customers. There is simply no transparency in the way loans are priced and repriced.
I will explain this through my experience. I have taken two housing loans from a prominent MNC bank.
These were taken in the years 2005 and 2006. I had taken the first loan when the Retail Lending Rate (RLR) of this bank was 9.5% and at that time this bank offered to give me the loan at 225 basis points i.e. 2.25 percent below this Retail Lending Rate. So effectively I got the loan at 7.25%. At that time most fixed housing loans were available at rates between 8.25-9%. The rate remained at 7.25% for some time, however as soon as the RBI started to increase its policy rates and CRR the Retail Lending Rate of this bank started to shoot up and it increased to 15% by the middle of 2008. This increased the effective rate that I was paying on my housing loan to 12.75%.
I took a second loan from the same bank in the year 2006 where I shifted a loan that I had from HDFC to this bank. At this time I was offered a discount of 1.5% over the Retail Lending Rate and my effective interest was in the region of 8%. Fixed rate loans were available at that time between 9-9.5%. This interest rate on this loan shot upto 13.5% by the middle of 2008.
And lo behold, as RBI started cutting rates in the second half of 2008 we were very happy (me and my wife) than now finally rates will start coming down. However to our astonishment there was no action from this bank till one week back. Even with RBI’s policy rates coming down to multi year lows, liquidity in the system shooting up, deposit rates coming down etc. etc. the RLR remained at a stubborn 15%. In the meantime most banks started announcing lower rates on loans for new customers but not for older existing one. Institutions like HDFC reduced rates to between 9-10%, SBI came out with a 8% loan scheme and several other PSU banks followed. However it seemed to have no impact on a vast majority of Foreign and Private sector banks. I even wrote a letter to this bank to which they replied that they were looking into the matter and would soon reduce rates. Finally they have reduced rates by just 0.5% last week.
Today this same bank, while keeping its PLR high give loans to new consumers at a greater discount to its RLR while keeping interest rates high for older customers.
I think this brings into question the very relevance of floating rates. This actually means that in a country like India, with the way most of these banks behave it is better to have a fixed rate rather than a floating rate, specially for consumer loans. I believe that this is nothing but taking customers for a ride as there seems to be no accountability on this front. As such I strongly believe that the proposal of RBI to bring more transparency into the lending practices of banks is a welcome move.
Also most people who are suffering because of these actions of banks should not take it lying down and question their banks as the floating rate provisions might be followed in letter but not in spirit. I believe that it is high time that some authority is appointed by either the Ministry of Consumer Affairs or the RBI to take care of interest of borrowers who are straddled with the so called “Floating but actually Non Floating Loans”.

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