Home loan-Unfolding the Mysteries

Home Loan -Unfolding the Mysteries

Prepared by Subrata DeyDec 2015

Prepared by Subrata Dey 2

Present Home Loan Rate (Dec 2015)

Av. is around 9.60% (Market Rate), What would be your basis to select the lender?

1. Lowest Interest Rates & Lowest EMI per lakh2. Zero Processing and administrative charges3. Pre approved project by financing company/bank4. Quick Approval /Corporate offer/Friend’s Advice?


Sam• In mid 2013, he borrowed Rs 38 lakhs @

10.50% (Floating Rate) for 20 years from one of the most reputed home financing corporation of the country.

• Off late he noticed he is paying more interest than the relatively new customers.

• He called up his lender and they demanded nearly Rs 20,500/- as the “Conversion Charges” to reduce the interest rate.

• He is worried now, he has to continue with the high interest till his next bonus and appraisal cycle.

If it Sounds familiar, you are not alone.


He discussed the issue with his colleagues and the findings were quite disturbing:

A few of his colleagues were not even aware of their latest interest rates, they have too much of project works. His project manager Mr. Ignorantly Busy is one of them.

A few of the them have already paid the “Conversion Charge” to lower their interest rates and even now they are at higher level than new customers.

One of his colleague Mr. Fore Closure , who took the loan in 2007 has recently fore closed the loan after paying 5 “Conversion Charges” during last 5 years.

Sam


• Did he and his colleagues missed something, somewhere?

• Why were they being discriminated with new customers?

• Whether transferring the loan to other lender will resolve the issue?

• How to avoids these discrimination charges forever?

These questions were troubling Sam.

Sam


Sam’s Research• Sam started his research work to unravel

the mystery of Discrimination & Conversion Charges.

• He used the most authentic and reliable source of information – “The Internet”

• While Googling with “Housing Finance” two following news items of 20th May, 2013 & 31st Oct 2015 caught his attention.


Sam’s Research


Sam’s Research

• The then Chairman of SBI Mr. Pratip Chaudhuri opined that there should be a single regulator for all home loans provided by both Banks and Housing Finance Corporations (HFC).

• Currently two different regulators are there, RBI regulates home loans provided by commercial banks (CB) while HFCs like HDFC Ltd, LIC HFL etc are regulated by National Housing Bank (NHB).

20th May 2013 Highlights


Sam’s Research

Regulates all the commercial banks


Sam’s Research

Regulates all the housing finance corporations


Sam’s Research

• Ms Arundhati Bhattacharya, Chairman of SBI said RBI’s regulatory arbitrage has created Un-level playing field between Commercial Banks and HFCs.

• HFCs like HDFC Ltd, LIC HFL etc can lend sub- RPLR (Retail Prime Lending Rate) to new customers without even reducing the PLR and thus existing customers suffer. Mr Sriram Kalyanaraman, MD & CEO of National Housing Bank defended the HFCs by stating that the cost of funds for HFCs are more than commercial banks and they can lend sub- PLR.

31st Oct 2015 Highlights


Sam’s Research

These two articles provided him the invaluable insight into the mysterious discrimination charges for existing borrowers.


Sam got the answers to all questions that were troubling him.• Did he and his colleagues missed something,

somewhere? – Yes, they were lured by attractive interest rate and reputation of HFCs.

• Why were they being discriminated with new customers? NHB allows the HFCs to let sub –PLR to attract new customers.

• Whether transferring the loan to other lender will resolve the issue? No, transferring to another HFCs will not resolve the issue.

• How to avoids these discrimination charges forever? Transferring the loan to a bank regulated by RBI will prevent it.


BPLR (Benchmark Prime Lending Rate) or RPLR (Retail Prime Lending Rate)

BPLR or RPLR is the minimum rate at which banks extend credit to it's top most customers. It was introduced in the year 2003 to price bank loans on the actual cost of funds.

However over a period of time banks started to give spread (discount) to customers and the system became opaque (beginning of discrimination). To attract new customers they offered more spread to them than their existing customers.


BPLR (Benchmark Prime Lending Rate) or RPLR (Retail Prime Lending Rate

It also resulted in another problem: Bank Interest Rates ceased to respond to monetary policy changes that the RBI introduced periodically i.e. IT BECAME A VEHICLE WITHOUT REVERSE GEAR. While they were quick to hike BPLR or RPLR in line with RBI rate hikes, they hardly reduced the rates during the downward cycle.


BPLR or RPLRLet’s look at the BPLR/RPLR of some leading HFCs

RBI was in the tightening mode till Mid of 2013 or so and Bank’s and HFC’s interest rates were at peak.

PLR was 12.5% in the year 2006

Thereafter RBI has been easing rates consistently. In 2015 alone it has cut the rates by 125 basis points (100 basis points =1%)

In reverse gear, our speed is too slow, from peak of 16.75% to 16.30% in two years.


BPLR or RPLRLet’s look at the BPLR/RPLR of some leading HFCs

We believe in forward movement only. Reversing is not our GOAL.


A short Introduction to “Spread”

BPLR or RPLR is the minimum rate at which banks extend credit to it's top most credit worthy customers.

But at 15 to 18% rate no one was willing to take the loan. So they applied the “Buttering Concept” to the very privileged customers.

You are very special customer to us, we will provide a discount of “s” over our PLR and quite naturally they call it “SPREAD”.


A short Introduction to “Spread”

HDFC’s current spread is 6.8% for women & 6.7% for men.

Interest Rate= RPLR –Spread9.5 = 16.3 – 6.8

Indiabulls current spread is 8.75%. Interest Rate= RPLR –Spread9.55 = 18.3 -8.75


Mr. Ignorantly Busy’s Loan Details




2009 2010 2011 2012 2013 2014 20150

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Mr. Busy Interest Rate shoot up to 11.75% (16.75-5)during Dec 2013 and came down to 11.3 (16.3-5)


New customers were offered home loan at prevailing Market RateSpread was increased from 5 to 6.8 gradually


Mr. Busy was paying Rs 31,500/- as the EMI instead of Rs 27,871/- and you can always do that, if financially possible for you.


Year Rate Interest PrincipalBalance Loan

2009-10* 9.5 310776 67224 29227762010-11 10.5 340824 37176 28856002011-12 11.5 329332 48668 28369322012-13 11.5 330854 47146 27897862013-14 11.75 325006 52994 27367922014-15 11.75 318433 59567 2677225

2015-16** 11.30 234026 49474 2627749

*Full disbursement was on Mar 2009, EMI started from Apr 2009 ** Upto Dec 2015 EMI

Mr. Busy paid Rs 3,78,000/- per annum from 2009-10 to 2014-15 (31500x12) and 2,83,500 (31500x9) in 2015-16.


If Mr. Busy’s rate were also reduced to the level of the New Customers by HDFC (Say due to regulator’s compulsion).


Year Rate Interest PrincipalBalance Loan

2009-10* 9.5 279849 98151 28918492010-11 10.25 292470 85530 28063202011-12 10.75 297804 80196 27261242012-13 10.5 281696 96304 26298202013-14 10.25 264314 113686 25161342014-15 10.05 246944 131056 23850782015-16** 9.6 168081 115419 2269569

Discrimination charges is the difference of Balance Loan on both cases and worked out to be Rs 3,58,180/-

Mr. Busy paid Rs 3,78,000/- per annum from 2009-10 to 2014-15 (31500x12) and 2,83,500 (31500x9) in 2015-16.


Mr. Fore Closure’s Loan Details








Mr Fore colusre paid nearly Rs 92,000/- (10% of the loan amount) more due to higher interest rates (than new customers) and conversion charges.


Base Rate SystemTo protect the suffering of existing customers RBI

implemented Base Rate System for Banks.


Base Rate SystemFrom 2003 onwards (introduction

of RPLR system) commercial banks as well HFC were using the same strategies to maximise their profit.

Discrimination was the norm and existing customers were suffering.

From 1st July 2010, RBI implemented the Base Rate System for all Commercial Banks.


Base Rate SystemBanks are not allowed to lend

below their base rate. (A few exceptions are there i.e. bank’s own employees etc)

Banks can charge a spread above their base rate. Spread varies for type of loan i.e. home loan, car loan, personal loan etc


Base Rate System

Axis Bank ICICI Bank SBI

0.75% reduction from peak 0.65% reduction from peak 0.70% reduction from peak


Sam’s Research

• Ms Arundhati Bhattacharya, Chairman of SBI said RBI’s regulatory arbitrage has created Un-level playing field between Commercial Banks and HFCs.

• HFCs like HDFC Ltd, LIC HFL etc can lend sub- RPLR (Retail Prime Lending Rate) to new customers without even reducing the PLR and thus existing customers suffer.

Mr Sriram Kalyanaraman, MD & CEO of National Housing Bank defended the HFCs by stating that the cost of funds for HFCs are more than commercial banks and they can lend sub- PLR.



Base Rate: 9.30%

Base Rate: 9.35%

Base Rate: 9.50%

Base Rate: 9.75%

RPLR Based

RPLR Based

RPLR Based

RPLR Based

Base Rate: 9.65%

Base Rate: 9.70%

1. Av. is around 9.60% (Market Rate), How HFC’s whose cost of fund is more according to NHB, CEO are offering same rate?

2. What will happen if any aggressive player reduces the Home Loan rate to 9%?

3. What will happen in case of another cycle of rate hike by RBI?



Base Rate: 9.30%

Base Rate: 9.35%

Base Rate: 9.50%

Base Rate: 9.75%

RPLR Based

RPLR Based

RPLR Based

RPLR Based

Base Rate: 9.65%

Base Rate: 9.70%

1. Av. is around 9.60% (Market Rate), How HFC’s whose cost of fund is more according to NHB, MD are at nearly same rate?

Customers looks for the interest rate only without getting into the details. No customers will borrow from HFCs if they offer home loan at higher rates than banks.

This is the TRAP.


Present Home Loan Rate (Dec 2015)2. What will happen if any aggressive player reduces the Home Loan rate to 9%?

Banks can offer home loans at 9% only by reducing their base rate to at least 9%

All customers will be get the benefit of rate cut, banks profit margin will decrease. In case they don’t reduce the rate they would lose customers to other banks. 9% will be the new Market Rate.

HFCs will simply increase the Spread without reducing their rates.

Only new customer will get benefit. HFCs will continue to earn more from Discrimination and Conversion Charges. This way there are recovering their higher cost of funds and maximizing the profits.


20xx 20xx 20xx 20xx 20xx 20xx 20xx0

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Banks all customers will be at nearly same rate.

Banks Vs HFCsWhat will happen in case of another cycle of rate hike by RBI?

Without Regulation, HFC Customers will continue to bleed

The only way to prevent it is by bringing HFCs to a base rate system.

Imaginary Values

Probable trend during the next rate hike cycle by RBI


Recommendations

A. Existing HFC Customer: Paying conversion charges is not the option. In

absence of regulator they will continue to exploit the situation.

Look for the offers, many banks are offering “zero” processing fee for loan transfer.

Transferring the loan to a Bank with Base rate system is the best option. The spread above base rate should be minimum, and preferably “ZERO” if possible.

Once your are close to the base rate, Market forces will take care of the your interest rate.


RecommendationsB. Existing Bank Customer:

For Loans prior to 2010 (before base rate system), the spread is likely to be higher. May be between 1.5 to 2%. For Loans after 2010, the spread is likely to be around1.5% or less.

Try to negotiate with your bank for the ongoing spread (0.0 to 0.25) without paying the conversion charges. If not possible look for the offers, many banks are offering “zero” processing fee for loan transfer.

The spread above base rate should be minimum, and preferably “ZERO” if possible.


RecommendationsC. Prospective Borrowers

Borrow from banks with base rate system, in case there are no compulsions. At present level of spread (0.0 to 0.25) discrimination not possible.

The spread should be minimum, and preferably “ZERO” if possible.

Incase you have to borrow from HFC due to any compulsion (project pre approved by HFC only), keep track of your interest rate and transfer to bank after a year or so.

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Home loan-Unfolding the Mysteries