Damodaran Committee: No difference in interest rates for borrowers in same class
Moneylife Digital Team 04 August 2011

The Committee has also said that all borrowers should be allowed to switch over from fixed to floating rates, or vice-versa, at least once during the tenure of the loan, and at an appropriate and reasonable fee

The Damodaran Committee on bank customer services has said that there should be no differentiation in the interest rates charged by banks to borrowers with the same risk rating and in the same category. Banks should also inform the borrower about the benefits of switching over to the base rate from the floating interest rate home loan, or vice-versa, the committee said in its report that was published by the Reserve Bank of India on Wednesday.

"In a floating interest rate scenario, when an entire class of borrowers has the same characteristic and risk level, the point of entry in time (old customers and new customers) should not create discrimination in interest rate offered to the customers. In such cases, the spread over the base rate should not vary when individual risk rating for loans is absent, as is usually the case in retail loans," the report said. The committee, set up by the RBI was headed by M Damodaran, former chairman of the Securities and Exchange Board of India.

Across the country, bank home loan customers who have floating interest rate loans have expressed unhappiness over the discrimination in interest rates offered to new customers. Existing customers of banks who are disadvantaged have been questioning the logical basis for giving such concessions to a few new customers and how the banking risk is lowered suddenly for such class of customers.

It recommends that "all home loans should permit a switchover between fixed to floating or vice-versa, at least once during the loan tenure, at an appropriate and reasonable fee."

"The risk rating system should be a critical input for setting pricing and non-pricing terms of loans and where the risk for any class of customers is the same, the interest rates for fixed rate loans should not vary at the same point of time, and for floating rate loans vary differently for different sets of customers at different points of time," the committee said.

The Damodaran Committee said it feels that regulation should plug such anomalies which create doubts about fairness regarding pricing, which should be transparent, non-discriminatory and also objective.

The Committee also said that there should be explicit regulatory prescriptions and a closer regulatory oversight of such actions by banks, which raise customer issues clogging the grievance redressal mechanisms.

On housing loan foreclosure charges, the committee suggested that banks should not impose exorbitant penal rates towards foreclosure of home loans and a policy should be devised to ensure that a customer is not denied the opportunity to enhance his economic welfare by making choices such as switching to other banks or financial entities to enjoy the benefits conferred by market competition.

The committee also says that all home loans must clearly state the most important terms and conditions and make this available in the local language and in a bigger font (preferably size 12). Banks should automatically provide the annual account statement, containing details of payments made towards principal and interest including the principal outstanding, to home loan customers without request from them.

The Damodaran Committee also suggested that "home loans backed by insurance products, in any eventuality, should be automatically settled by the insurance amount with minimum inconvenience to the nominees and heirs. The procedure should be explained upfront to the customers."

Another key recommendation is on title deeds. "The title deeds should be returned to the customers within a period of 15 days after the loan closure and the Boards of banks should put in place a suitable compensatory policy to compensate the customer  for delayed return of title deeds or where there is a loss of title deeds in the custody of the banks."

The report says regulation should ensure that customers clearly understand the pricing policies of banks, as the committee in its interactions all over the country saw that variances in these issues give rise to customer dissatisfaction.

Comments
Manish Shah
1 decade ago
Even after changing to base rate the problem of differential rate for new and old borrower continued. I am having housing loan from IDBI bank since Jan 2008. At present, interest rate is 12.5%. While the new borrowers are paying less than 11%. In order to reduce the burden, I increased the EMI by 50% and made a large chunk of prepayment. Several times in the news it has been reported that IDBI BANK is planning to come up with an innovative scheme for existing borrowers to reduce interest rate burden. I requested several times the bank to make interest rate in line with the current interest rate to new borrowers, but failed. At one instance, I approached to a very senior executive of the bank to help me out on the same considering the payment track record (paid off 33% loan amount in 36 months) but failed. There is only one way to address this issue is:
1) The reference rate for deposits and loan should be market driven and same across all banks
However, RBI it self does not have any single reference rate it is hard to believe that the bank would move to single reference rate.
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