Money & Banking
Home loan interest rates: Games banks and financial institutions play

When home loan interest rate is reduced, the benefits are passed on to new customers while an increase is applicable to all old customers. Why banks, lenders are allowed to indulge in this jugglery in the name of floating rate of interests?

Here comes the good news. But before you hear the good news, let me tell you there is an irony attached to this good news. The same news which is good for some prospective customers is bad for large number of existing customers. Three home loan players have reduced the rate of interest on their home loans but the reduced rates are applicable only for the new customers. These three institutions are ICICI, HDFC and Vijaya Bank. On 12 October 2012 these institutions announced a reduction in the rate of interest on home loans upto 1%.  The reduced rate of interest is obviously meant to attract new customers on the occasion of forthcoming festival of Diwali when many customers decide to book home and go for home loans.

This move has once again raised the most perplexing question related to lending practices of banks, “Why is that when rate of interest is reduced on home loan, benefits are passed on to new customers only, while an increase in rate of interest is applicable to old customers?”  Why are banks allowed to indulge in this jugglery in the name of floating rate of interests?  Let us investigate this question in detail. Banks and financial institutions generally do not touch their BPLRs (Base Prime Lending Rates) and Bank Rate. These institutions only adjust the spread that they charge on home loans below PLRs and above Bank rates. So for example if the BPLR of a bank is 16% and it was providing a spread  of PLR minus 5% for an existing customer, for new customers the rate is changed by keeping PLR at 16% but changing spread to 6% which automatically changes the rate for new customers. Similarly in case of Base Rate, the rate is kept unchanged and the spread charged over the base rate is adjusted.

Now let us look at reasons that banks often point out for doing this and not adjusting rate of interest for all customers. Though banks do not have a very tangible answer for this they try to provide some answer which sounds logically flawed but hardly draws the attention of the regulator i.e. Reserve Bank of India (RBI) .The most unacceptable logic given is that since the cost of borrowing for banks for existing customers is high, they cannot pass on the benefit of reduced rate to existing customers. Hence they make the benefit available to new customers. This logic seems totally flawed.

Let us analyse two different scenarios for understanding the logic extended by banks. Let us look at the practice being currently followed by HDFC, one of the leading players in home loan market. If you have a home loan from HDFC, the financial institution allows you the benefit of the new rate on interest by charging an amount which they call as “conversion fee”. So if you want the benefit of reduced rate of interest pay the conversion fee and get the benefit of reduced rate of interest, even as an existing customer. This amount depends on the home loan availed by you. The surprising thing here is that HDFC allows one to go for new rates multiple times as an existing customer by a paying conversion fee every time you want rate of interest to be changed on your loan. This shows that cost of borrowing has very little significance in policy-making and HDFC wants their existing customers to pay a fee post which they are ready to pass on the benefit of reduced rate of interest. The fee charged is not good enough to compensate the so called cost of borrowing. This shows that the practice followed is unethical and needs attention of the regulators.

But much more than this, what is unfair is the other practice followed by banks and financial institutions. If you have an existing loan from one bank and want to shift it to another bank which is offering lower rate of interest, you are entitled to get the benefit of a reduced rate of interest. So as a customer you again end up paying a processing fee and some costs attached to the paper work. This again shows that cost of borrowing has very little role to play in this. The processing fee is a nominal amount generally compared to the home loan amount.

These two practices followed by banks and financial institutions shows the unfair practices being followed by them which they do in the guise of pricing of products which seems to be the natural right of these institutions in absence of clear cut regulatory guidelines. While rate of interest on fixed rates, whether deposits or lending may remain same, it does not make sense to do the same on floating rates? But is the regulator listening?



Dayananda Kamath k

5 years ago

floating rate regime is one of the most abused system to loot the borrowers as applied in india with active connivance of the regulator Reserve Bank of india. in floating rate and at every change of interest announced by banks they do not inform what aspect of the floating rate is being changed by the bank. ie whether they have changed base rate or mark up. this is basic need for transperancy in administration of floating rate. further in every sanction they have to clearly mention what is interval for resetting the rate ie once in quarter or halfyearly or yearly. and the rate should be reset only on these intervals if there is any change in base rate. but none of the banks follow this. it is violation of the contract act also. this matter has been brought to the notice of governor reserve bank of india and also followed up but no action so far.

Sachin M Regundwar

5 years ago

It is true even with public sector banks like LIC Housing finance. I was offered the loan with a spread of 3.5% Later on, I found that this spread is changed to 2.5% only. When, I spoke to the concerned officer, I was told that the offer was only for 1 year and later on it depends on bank to decide the spread. Still, I am not satisfied with their answers. I want to take up the matter to higher ups, but I don't know how to go ahead.


5 years ago

A very informative article and what you have stated above wrt HDFC is very true. And charging of conversion fees is very unfair and even if home loan is shifted to some other bank then also amount of proceesings is more or less same as compared to conversion fees. But appropriate authorities should come forward and look into these matter in the interest of the public.

Standard Chartered Bank to pay Rs2.97 lakh for deficient service

Delhi resident Sunita Verma had alleged that her car, a Maruti Omni, bought on a loan from StanChart was taken away by the bank on default of payment and despite her paying the remaining amount the vehicle was sold

New Delhi: The State Consumer Commission has dismissed a plea filed Standard Chartered Bank (StanChart) against a district forum order asking the bank to pay Rs2.97 lakh to a loanee for seizing her car for non-payment of Rs30,000 and selling it despite subsequent payment of all dues by her, reports PTI.


The vehicle was sold after the borrower refused to take it back as its crucial parts had allegedly been removed, rendering the vehicle to a non-working condition.


The Delhi State Consumer Commission observed the woman's willingness to pay the remaining loan amount of Rs30,000 showed she was keen to take the car back and there must have been some compelling reason for her for not doing so.


"It appears that statement of respondent (loanee) that the vehicle was not in a condition for taking possession needs to be accepted. It is evident that on one hand the appellant bank (Standard Chartered) is entering into an arrangement to return the car on payment of Rs30,000 and on the other hand its officers allowed parts of the car to be removed which is a case of negligence and serious deficiency-in-service.


"We are of considered opinion that a case of deficiency in service is made out beyond doubt and to serve the ends of justice it would not be proper to interfere with the order of the district forum. The appeal is accordingly dismissed," the bench presided by Justice Barkat Ali Zaidi said.


In her complaint to the district forum, Delhi resident Sunita Verma had alleged that her car, a Maruti Omni, bought in August 2001 on a loan from the bank was taken away by it on default of payment and despite her paying the remaining amount the vehicle was sold.


While admitting that Verma had paid the remaining Rs30,000 to it, the Standard Chartered had alleged that the car was sold after she refused to take possession of it.


The district forum, however, had held the bank guilty of rendering deficient service and had directed it to refund her Rs2.37 lakh she had paid to clear her loan and also another sum of Rs60,000 as compensation and litigation cost.


IAS officer probing Robert Vadra-DLF deal transferred

Khemka, the IAS officer from Haryana, cancelled the mutation of over three acre plot that Vadra's company allegedly sold to DLF last month, on the grounds that the mutation violated the States Consolidation Act

Chandigarh: A senior Indian Administrative Services (IAS) officer from Haryana is at the centre of a raging controversy after he was transferred in the wake of his decision to probe alleged undervaluation of properties dealt with by Robert Vadra, son-in-law of Congress President Sonia Gandhi, reports PTI.


Significantly, on the last day of his posting as Director General of Land Consolidation and Land Records-cum- Inspector-General of Registration yesterday, Ashok Khemka also issued an order cancelling the mutation of over three acre plot of land in Manesar-Shikohpur that Vadra had sold to DLF.


Khemka, a 1991-batch officer, on Tuesday attacked the decision to transfer him, saying it was "demoralising and dehumanising".


"If these problems are brought in sunshine, probably my decisions would appear to be normal and correct. But what happens is, inside, you are guided and directed that behave differently.


"If you do take an action which you call strong but I would call as correct, and then action is taken against you, it's very demoralising, dehumanising and you feel ashamed of yourself that look, there must be something wrong with you that these things are happening.


"You get words like 'you don't get along well with others, 'there are shades of grey in life' etc. These kinds of euphemism are created to deviate you from the correct path," he said pleading for security as he feels "threat" from "vested elements" whom he has been exposing from time to time.


In his 12th October letter, a day after his transfer orders were issued, addressed to the Deputy Commissioners-cum-Registrar, Gurgaon, Faridabad, Palwal and Mewat districts, Khemka's letter reads "inquiry regarding under valuation of some properties registered by Robert Vadra or his companies as vendor or vendee".


In the letter, Khemka wrote "As per the records of one property, M/s Sky Light hospitality had purchased Khasra No 730 (3.53 acres) of village Shikhopur, district Gurgaon vide sale deed number 4928 dated 12 February 2008 for Rs7.5 crore.


"This property was re-sold to M/s DLF Universal for Rs58 crore vide sale deed number 1435 dated 18 September 2012 after obtaining LOI/licence from the Director, Town and Country Planning, Haryana on 28 March 2003, subsequently renewed on 18 January 2011 for 2.701 acres," he alleged in the letter.


Khemka cancelled the mutation of over 3 acre plot that Vadra's company, M/s Sky Light Hospitality, had allegedly sold to DLF Universal Ltd last month on the grounds that the mutation violated the States Consolidation Act and was done not by a revenue officer but by the Assistant Consolidation Officer of Gurgaon unauthorisedly.


Khemka, who was also the Inspector General of Registration, formally ordered an inquiry across four districts into the alleged under-valuation of some properties registered by Vadra or his companies as vendor or vendee.


The IAS officer further mentions that village Shikhopur of district Gurgaon was re-notified under the provisions of East Punjab Holdings (Consolidation and Prevention of Fragmentation) Act, 1948 on 5 August 2011.


"The sale of property on 18 September 2012 during the pendency of the consolidation proceedings without sanction of the Consolidation Officer was against provisions of Section 30 of the Consolidation Act. The mutation number 4513 sanctioned on 20th September this year by the Assistant Consolidation Officer was also without jurisdiction, since he is not a Revenue Officer under the Punjab Land Revenue Act," he stated.


Noting that "under-valuation" of property leads to loss of revenue, Khemka said that in view of questions raised in reputed national dailies and to clear the name of Registering Offices in Haryana, he considers "it fit and appropriate to order DCs-cum-Registrars of Gurgaon, Faridabad, Palwal and Mewat shall inspect all documents registered from 1 January 2005 and till date by or on behalf of Vadra or his firms in the capacity of either vendor or vendee and compile such list for examination.


"They (DCs) shall estimate the real value of the property conveyed through registered documents and in case of under-valuations, the matter shall be referred to Collector under Section 47-A of the Indian Stamps Act for correct assessment of the stamp duty payable," Khemka said.


While mentioning the name of a reputed national daily, Khemka in his letter further directed the DCs that the report must reach the office of Inspector General of Registration, Haryana by 25th October this year.


Quoting the daily, he mentioned the names of some companies of Vadra as "Sky Light Realty, Sky Light Hospitality, Real Earth Estates, Blue Breeze Trading, Artex and North India IT Parks".


In his letter yesterday to Director General, Town and Country Planning Department and Deputy Commissioner-cum- Registrar-cum Assistant Director, Consolidation, Gurgaon, Khemka advised the former not to accord permission or issue Letter of Intent/licence or Change of Land Use "in violation" of Consolidation Act or Land Ceiling Act "at least in future".


He mentions that with reference to registered sale deed of 18th September of village Shikhopur, Sector 83, Gurgaon, for sale of 3.531 acres against total consideration of Rs58 crore by vendor, M/s Sky Light Hospitality Private Limited, to vendee, M/s DLF Universal Ltd, of which part area of 2.701 acres is issued LOI/license dated 28 March 2008 and subsequently renewed on 18 January 2011 by Town and Country Planning Department, Sky Light Hospitality had allegedly received Rs50 crore out of total sale consideration of Rs58 crore by 7 October 2010 as per the registered sale deed.


"The vendor had ex-facie entered into a sale agreement with the vendee or on before 3 June 2008, when part payment of the total sale consideration was received. It is not known what made the Town and Country Planning Department to renew the LOI/licence on 18 January 2011 in favour of the vendor, when 86.2% of the total sales consideration was paid to him by 10 October 2009, that is 15 months before the date of renewal of the LOI/licence.


"If the vendor suppressed the material fact that he had entered into a sale agreement of the impugned property with M/s DLF Universal, against which he was paid 86.2 per cent of the total sales consideration 15 months before the renewal of the LOI/licence, then the Department ought to be taking action against vendor for suppressing the material fact," Khemka's letter said.


"On the contrary, had the vendor informed the Department about his entering into an agreement to sell on or before 3 June 2008 with M/s DLF Universal, it is unfathomable how the Department could renew the LOI/licence on 18 January 2011 in favour of the vendor who had ex-facie entered into an agreement to sell within 65 days of the issue of first LOI/license," Khemka wrote.


He further said in the letter that action of the Sub-Registrar, Manesar to register the property on 18th September this year when the estate of Shikhopur was under consolidation was also not proper.


"A mutation number 4513 was sanctioned without jurisdiction on 20 September 2012 to give effect to the sale deed no 1435 dated 18 September 2012 by Assistant Consolidation Officer, Gurgaon, who is not a revenue officer...I hereby set aside the mutation ... on the ground that the Assistant Consolidation Officer who had sanctioned the mutation was not competent to do so," he said.


Talking to reporters here today, Khemka alleged that there was a nexus between politicians and officers and "insider trading" was happening "under which gullible land owner is made to part with his land by paying peanuts".


"I also want amendment in the Prevention of Corruption Act so that government officials found guilty of insider trading are punished," he said, adding that he had been trying for an amendment to prevent panchayat or village Shamlat land (common land) being sold by circumventing and manipulating rules.


Khemka said that before being shunted out from the department, he was also trying to have entire land records made online by November to bring about more transparency.


Asked if he was under any kind of pressure from politicians or senior bureaucrats, he said, "They know what type of person I am and I don't accept any pressure. There has been no pressure, at the most I have been frequently transferred".


After his transfer, 43rd in his career so far, the senior Haryana IAS officer had charged the state government with "abruptly" transferring him and had even shot a letter to State Chief Secretary PK Chaudhery.


In his letter to Chaudhery a day after his transfer, Khemka had pointed out that there should be a minimum tenure of two years as per the statutory IAS (Fixation of Cadre Strength) Regulations 2010, "but the state government has violated statutory regulations".


Chaudhery had maintained that the IAS officer's contention that his transfer was a punishment was not correct.


In his letter, Khemka had said that acting as a whistle-blower on "several dubious" land transactions has come as a "punishment" for him.


"It is shocking to learn about my abrupt transfer...this is deliberate and malafide to punish me due to some vested elements in the political-bureaucratic hierarchy affected by the expose of the scams in consolidation of land holdings under the exercise of powers," he wrote in his letter.


During his 50-day stint in the department, Khemka had detected irregularities in land transactions involving transfer of panchayat land worth several hundred crores of rupees to newly created real estate companies.


Khemka, who is known in bureaucratic circles as an upright and honest officer, had in 2004 refused to obey the orders of the then state government headed by Om Prakash Chautala with respect to transfer of teachers mid-session.




5 years ago

How dare he? MANGOMAN! *&%^*%&*

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