If the Reserve Bank of India (RBI) has its way, then retail loan customers of banks will soon be quoted a single, all-inclusive interest rate with no hidden charges or fees. This will allow them to work out their exact cost of borrowing and also allows for easy comparison across offerings by other banks and institutions. This is part of RBI Deputy Governor Dr K C Chakrabarty’s effort to bring transparency to the working of commercial banks.
“Customers should get statements once in a year with all inclusive cost or annual effective rate (AER) which will cover interest rate comprising various elements of costing such as cost of funds, legal fees, inspection charges, switch-over fee, etc,” said Dr Chakrabarty, speaking to bankers recently. He wants to make the rules stringent and transparent for most of the services delivered by banks.
RBI has been receiving complaints about the unfairness of home loan rates, wherein most banks are reluctant to reduce interest rates for existing borrowers while new customers are offered lower rates. Dr Chakrabarty wants all existing customers to enjoy the current rate of interest and has asked RBI nodal officers to take up the issue with the head offices of various financial institutions. At the same Bhopal conference, he said, “When the cost of fund at a point of time reflects the floating rate offered at that time, how can it be different for different for two sets of borrowers?”
Speaking to Moneylife, Dr Chakrabarty said that many issues relating to retail lending happen because bankers are confused about who is the retail borrower. He says, “Ask 10 bank chairmen and each will define the retail borrower differently.” His own definition is very precise; he says, “banking for the individual, that is, for non-entrepreneurial activity is retail lending,” it has nothing to do with size. For instance a farmer is a small borrower, but he should not be confused with a retail borrower, because he is an entrepreneur. On the other hand credit cards, mortgage, auto loans are all retail loans and in all these cases, the recovery will not be from the asset that is created but from some other source of income. Once the definition is clear the next step is to ensure that pricing is transparent and non-discriminatory. Unfortunately this has not happened as yet.
Another area of concern for Dr Chakrabarty is to take banking to the masses. He points out that even today, 60% of the population does not have access to a bank account and he is more concerned about extending the reach of banking to these segments.
Speaking on the issue, a financial sector source told Moneylife, “We mostly receive complaints from existing customers since they cannot enjoy the benefit of the current reduced interest rate. But we also cannot pass on the benefit to the customers free of cost. That is because the interest on floating rates depends on the rate at which the institution is borrowing from the market. If the institution is borrowing at a lower rate, it will pass the benefit to the customers, if not, customers get angry. RBI is looking into the issue and trying to find a solution.”
Banks have also been asked to hasten the process of re-crediting customer accounts in case of a wrong debit. There are times when faulty ATMs do not allow customers to withdraw cash although it is debited from their accounts. Banks take as much as 12 days to re-credit the money when it ought to take only three working days now that most banks now have adopted core banking solutions (CBS) that allow money to be transferred within minutes from one account to another.