ATM :: Existing home loan borrowers get raw deal in base-rate cuts

Harsh Roongta | Tuesday, 28 April 2015 – 5:15am IST | Agency: dna |


The larger home loan lenders needed a huge nudge (almost a shove) from the Reserve Bank of India governor and the finance ministry before they started reducing rates earlier this month. After the biggies reduced their rates most other banks have followed suit. Most banks announcing interest rate reductions are making a virtue out of the point that the new reduced rates apply to existing as well as new borrowers.

Here I was thinking that with the base rate regime mandated by RBI makes this a requirement rather than a “concession” by the banks to its existing borrowers. (Note: The base rate regime anyways does not apply to housing finance companies such as HDFC and LIC Housing Finance). Of course, if you look a little closer you realise that even in the current round of rate reductions the new borrowers get a much bigger reduction than the existing borrowers.

Base rate/ Benchmark rate as on Jan 3, 2011 15% 8.25% 8%
Spread as on Jan 3, 2011 Minus 5.50% Plus 1.25% Plus 1.50%
Interest rate paid by new borrower as on Jan 3, 2011 9.50% 9.50% 9.50%
Base rate/ Benchmark rate as on Apr 21, 2015 16.55% 9.75% 9.85%
Spread as on Apr 21, 2015 for new borrowers Minus 6.65% Plus 0.15% Plus 0.05%
What New Borrowers pay as on Apr 21, 2015 9.90% 9.90% 9.90%
What New Borrowers of 2011 pay as on Apr 21, 2015 11.05% 11.00% 11.35%

I was curious to check on how the various lenders have fared since 2011 in terms of being fair in providing interest rate reductions to their existing borrowers. At Apnapaisa we have tracked all home loan rates since 2008 for almost all the major lenders in the market. We found that not a single lender has been completely fair to its existing borrowers.

As you can make out from the compilation all the three major lenders have exactly the same rate for new borrowers both in January 2011 and in April 2015 and equally the borrowers who stuck to their lenders since January 2011 are all much worse off today paying 11% plus. In fact, contrary to popular perception a January 2011 borrower from the public sector State Bank of India is marginally worse off than a similar borrower from its private sector competitors. This is only a compilation comparing the three top home loan lenders. A complete comparison of all other lenders is even more depressing in the display of unfairness quotient.

The only consolation in the “unfairness” contest is that the banks are down to spreads of 0.05% to 0.15% and thus have limited scope to differentiate between their new and old borrowers going forward. Theoretically the housing finance companies have no such limitations. So it is quite possible that if this same “unfairness” contest was done in 2018 we may see the housing finance companies top the charts in unfairness.

Meanwhile hopefully both the regulators will step in and ban this contest all together.

The writer is director, Apna Paisa

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