RBI proposed banks to charge uniform home loan rate to old customers but major banks rejected the proposal
Driven by angry mortgage borrowers, RBI has once again nudged top banks to charge lower home loan rates to old customers instead of just using the lower interest rates to pull new borrowers. But lenders continued to resist the proposal, citing cost mismatch. The contentious issue cropped up when CEOs of large banks met senior RBI officials on Thursday to suggest possible measures that the central bank could consider for the January 29 monetary policy.
At the meeting, RBI deputy governor KC Chakrabarty reminded bank chiefs that the regulator had earlier voiced its concern over banks’ inability to pass on the benefit of lower interest rates uniformly to all customers. It has been a common refrain among home loan borrowers that while banks are slow to pass on a rate cut, they are quick to hike either the loan term or the EMI (or equated monthly instalments) when rates go up.
Under present circumstances, old borrowers continue to pay more since their rates are linked to the benchmark prime lending rates, which most banks have not changed since April 2009. But since then, banks have come out with lower lending rates and new schemes to target new borrowers, leaving old customers feeling that they got a raw deal.
Bankers present in the meeting argued that since the incremental cost of fund had softened, they could charge lower rates only to new customers while old customers had to pay more as old funds were raised at a higher cost. Countering this, the regulator said reduction in incremental cost of funds also brings down the average cost of fund for a bank which should then be in a position to offer the new, lower lending rate to old as well as new borrowers.
Some banks said offering the same rate to all could spark legal feuds since interest spreads (over or below the PLR) varied from customer to customer, each of whom sign separate loan contracts with banks.
Besides, Mr Chakrabarty, RBI deputy governor Subir Gokarn and executive director Deepak Mohanty were present in the meeting. Among bankers, the meeting was attended by SBI chairman OP Bhatt, ICICI Bank CEO Chanda Kochhar, Canara Bank CMD AC Mahajan, Bank of Baroda CMD MD Mallya, Punjab National Bank CMD KR Kamath, Union Bank of India CMD MV Nair, MD of HDFC Bank, Aditya Puri, India CEO of Standard Chartered Bank, Neeraj Swaroop and Citibank India CEO Mark Robinson.
Some of the bankers took the opportunity to spell out how their financials could come under strain. The state-owned bank chiefs told RBI officials that profits would come under pressure next fiscal due to the outgo on higher salary as well as pay arrears of the last two years. Besides, banks would have to pay higher interests on savings account deposits from April 2010.
Banks asked RBI whether they could amortise the wage payment over five years. As per the agreement between employees and bank managements, banks have to pay 17% higher salary from November 2007, which will translate into a cumulative annual outgo of Rs 4,815 crore for public sector banks.
From April 2010, banks will have to pay interest on savings deposits on a daily basis instead of the current practice of paying interest on the
lowest balance in the last 20 days of the month. Banks told RBI that to protect their margin (the spread between the cost of funds and yield on advances), they should be either allowed to give a return lower than the fixed 3.5% savings account interest or stick to the system of paying on the lowest balance. In this context, banks once again made a pitch for a return on the cash reserve ratio (CRR) — the slice of customer deposits that banks have to park with RBI. Currently, there is no interest on CRR which serves as a tax on lenders.
A CEO of a private bank said in a surplus liquidity condition, RBI’s suggestion —as outlined in the recent report on BPLR that banks should not lend more than 15% of total advances below the base rate — could make it difficult for banks to meaningfully deploy their money. Banks then would be forced to park the surplus with the central bank, said the banker. Responding to this, an RBI senior official said in such circumstances, banks should consider lowering their base rates to manage liquidity. Banks also added that while there was some loan demand from farmers, small businessmen and individual consumers; corporate borrowing was lesser than last year.