Harsh Roongta | Tuesday, 2 June 2015 – 6:55am IST | Agency: dna | From the print edition
In recent times the major issue faced by home loan consumers is the tendency of the lenders to keep their interest rates high even as they welcome new home loan consumers with much lower interest rates.
In the last decade when experts addressed home loan consumers they asked them to avoid lenders who took EMIs on a monthly basis but calculated interest on annual basis. Competition soon put a stop to this consumer unfriendly practice. In recent times the major issue faced by home loan consumers is the tendency of the lenders to keep their interest rates high even as they welcome new home loan consumers with much lower interest rates. Ironically, they may not have to envy the new home loan consumer too much as he could be paying much higher than he bargained for.
In a shocking incident a home loan consumer bought to my notice a pernicious practice of charging steep processing fees hidden away in the first EMI. This consumers’ real life example is given in the box below. The consumer was being charged interest for the full month in the first EMI even though only 16 days had passed between the disbursement date and the first EMI payment date. He was paying an additional amount (0.41 % of the loan amount in his case) over and above the contracted interest amount. This was also contrary to the loan agreement entered into between the lender and the consumer. This particular consumer did not ignore it. He spoke to a few of his other friends who had borrowed from the same bank and realised that the bank was overcharging interest on a systematic basis rather than just in his isolated case. In fact, the overcharging was much more in other cases because home loan disbursement are bunched around the month end and the EMIs tend to be payable in the first 10 days of the month and hence the overcharging is much higher than the 14 days of interest as in his case. He has not received any response from the bank officials to his written complaints.
Many senior officials of the bank visited him and verbally offered to make good the overcharged amount to him but he wanted the facts to be put in writing to him so that he could take up the matter on a systemic basis rather than for his isolated case. The bank officials were unwilling to offer anything in writing. He also wrote to RBI but did not receive any response. This practice is not in accordance with the lenders own loan agreement with the borrowers and is a clear case of overcharging. Since this bank lends more than Rs 20,000 crore of home loans every year the additional amount charged can be as high as Rs 100 crore per annum if 0.50% overcharge is assumed on an average. The impact of this kind of overcharging on car loans and unsecured personal loans and all other EMI loan products disbursed by the bank could also be similarly high.
Only a detailed investigation can conclude if this consumers’ case (and those of his couple of friends whom he has spoken to) is a one-off case or is a system-wide problem within that bank. It clearly does not seem to be an industry wide practice from my preliminary chats with the major players in the industry. To their credit, major public sector banks have always touted their daily rests basis of interest calculation. And thus by definition do not follow this kind of practice.
RBI’s grievance redressal mechanisms do not help since by design they only help solve a specific consumer’s grievance and these systems do not look at systemic issues such as the one highlighted above. Meanwhile, this consumer is not taking this lying down and has now filed a public interest litigation in the Bombay High Court against the RBI for permitting this practice to continue.
I am not sure if the courts will entertain this petition but I earnestly hope that the issue will gain enough traction so that the top management of the concerned bank or the regulator is forced to take notice and take remedial steps. As consumers you should take care to double check the interest and principal breakup of your first EMI to ensure that you are not paying more than what you bargained for.
The writer is director, ApnaPaisa.com
His home loan of Rs 1.55 crore was disbursed on April 24, 2014. As per the agreement the EMI date was fixed as the 10th of every month and @ 10.50% p.a. the EMI for 180 months was Rs 1,71,337. Logically he should have paid only the interest amount for the first 16 days (from April 24, 2014 to May 10, 2014) amounting to Rs 71,342 (being Rs 1,55,00,000 * 10.50%/365 * 16 days) and then the regular EMI payments of Rs 1,71,337 should have begun on June 10, 2014. Instead to his shock and surprise the entire EMI of Rs 1,71,337 was debited on May 10, 2014 and furthermore when he checked his statement of account he realised that the interest has been charged for an entire month i.e. Rs 1,35,625/- (being Rs. 1,55,00,000 *10.50%/12) and only the balance amount of Rs 35,712 (being EMI of Rs. 1,71,337/- minus interest of Rs 1,35,625/-) was adjusted against the principal loan outstanding. This effectively meant he had paid extra interest of Rs 64,283/- or 0.41% of the loan amount).