RBI safeguards old home loan 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.