We have now heard several pronouncements that RBI wants more transparency in how floating rates are charged to consumer based on the manner in which the benchmark rates (PLRs) of various banks are set. Reportedly another committee is being set up to examine this vexed issue. Even Mr. K C Chakrabarty the incumbent deputy Governor of RBI has opined that banks should not be allowed to reduce rates for new consumers without reducing it for existing consumers.

This off course is of very little comfort to millions of existing home loan consumers who find themselves paying high interest rates to their lenders while watching the same lenders woo new consumers with single digit interest rates (see box on how the lenders accomplish this).

Lenders on the other hand argue that unlike new borrowers who are funded out of new low cost deposits, their existing borrowers are funded out of the earlier higher cost deposits and hence it will take time before the benefit of the lower cost of deposits can be passed on to them. There is considerable merit in this argument. However the lenders should not be allowed to take advantage of this argument simply because they have not applied the same rules when the cost of deposits was rising (and hence only the new borrowers should have paid a higher rate immediately and not the existing borrowers). With one sole exception, I am not aware of a single occasion when rates were increased for new borrowers without increasing it for the existing borrowers.

There are clearly no simple solutions to this issue. But a few things can definitely be done immediately to bring in some modicum of transparency and fairness in the interim period before the committee comes out with its report:

1) It should be mandatory for the bank to display the movement of BPLR (or any other reference rate with which any loan or deposit rate is linked) right from inception of that rate. This will ensure that customer comes to know about the movement of the reference rate of a particular bank especially during the time when general interest rates were falling.

2) It should also be made mandatory to publish the spread data (see box for what spread means) for all loans made in a particular quarter for at least the last 8 quarters.

3) The most important thing that the regulator can do is to immediately come out with guidelines to ensure that the consumer can transfer his loan to another lender easily in case he is not satisfied with the rates charged by his existing lender. Currently the existing lenders erect several roadblocks in the way of such transfer to prevent their good customers from getting better deals from another lender. To ensure that the transfer process is smooth the regulations must provide that:

a. On request from the borrower and the prospective new lender, the existing lenders should be required to provide a letter in a prescribed format to the prospective new lender laying down

i. The amounts payable on which the loan will be treated as fully Closed

ii. The list of original documents held as security by the existing Lender

iii. An undertaking that they will handover all the original documents and a no dues letter to the authorized representative of the new lender within a fixed number of days after the payment is received

These measures can go a long way in improving transparency and fairness in retail loans even as the new committee deliberates on how to fix the reference rates more transparently.