A leading pink paper on Tuesday September 22, 2009 broke a story on its front page  about how RBI is planning to ban all sub-PLR loans for tenures beyond a year. The story mentioned, “If RBI bans sub-PLR rates on loans above a year, banks will find it difficult to reduce rates only for new home loan customers”.

Even this move will not end the trouble of existing home loan consumers who watch on enviously as new customers get lower and lower rates while they are stuck with higher rates. To understand this let’s look at how PLR affects home Loan consumers.

So what is this PLR? PLR stands for Prime Lending Rate or in other words the rate at which the banks will lend to their most Prime customers (customers with the best credit parameters). This way PLR should be the lowest rate at which the bank will lend.  In India lot of banks have more than 80% of their loans being lent out on rates below their PLR. This is due to non-transparency in fixing PLR making PLR itself meaningless.

Also PLR is normally supposed to apply across all loans but most Private banks have different PLRs for different products which completely send the whole concept of PLR for a toss. 

You can see the box below to see how banks can continue to charge existing consumers a higher rate than what they offer to new consumers even after SUB-PLR rates are banned.   

In fact the remedy for home loan consumers already exists in  the form of existing RBI regulations that require that all reference rates should be external and objective which is not being followed by banks. (see this link http://www.apnaloan.com/home-loan-india/some-important-regulations.html). 

So if you are an existing  Home loan customer being treated unfairly by your lender you should immeidately complain to the banking ombudsman that the bank is not following existing RBI regulations regarding transparent fixation of reference rates.

How banks will continue to charge more even after banning SUB-PLR lending?

All floating rate are linked to the movement in a reference rate. For banks in India the reference rate for floating rate loans is a particular PLR of that bank.

Let us say you took a home loan from bank A at 3% below their PLR for home loans (say called Retail PLR) when the Retail PLR was 12%. Thus the effective rate applicable to you became 9% (Retail PLR at 12% less 3%).

Now if the lending rates drop in the market to say 8% it may offer loans to new customers at 8% by increasing the spread from the Retail PLR (i.e. Retail PLR 12% less 4% = 8%). Since the Retail PLR itself has not changed, the existing customers continue to pay 9% whereas the new customer gets 8%.

How banks can continue to provide lower rates to new Home loan customers whilst charging higher rates to existing customers even after the ban on Sub-PLR loans

A momentous moment in India’s retail lending history has just been ushered in very quietly. A few days ago Credit Information Bureau of India Limited (CIBIL), which is currently the only fully operational credit bureau in India, quietly introduced a manual system to provide consumers with their own credit history on a test basis. In a written communication from CIBIL to Apnapaisa it has been clarified by CIBIL that “CIBIL has started offering Consumer disclosures through an interim solution. This interim solution is a testing phase and we will be able to operationalize the full-fledged Consumer Relations System basis our learning from this phase. In this interim phase CIBIL will be manually handling consumer requests for a copy of their credit information report.  CIBIL is also developing the infrastructure, systems and processes for an automated solution that would be needed to enable an individual direct access to their Credit Reports from CIBIL on-line.  The full-fledged Consumer Relations System will have world-class features that will allow consumers to access their report on-line and banks to respond to errors via an on-line maintenance tool. The automated phase is expected to be ready by the beginning of next fiscal year “.

So why is this such an important event that I am calling it a momentous occasion for the Indian retail lending history. For those of you who have just tuned in, CIBIL is one among 4 credit bureaus that have been licensed by the RBI under the Credit Information Companies Regulations Act, 2005 (CICRA). CIBIL though is the only one that already been operational for around a decade now and has the credit repayment history of around 13.7 crore loans or credit cards.

Almost all of the major lenders provide details of the credit facilities given by them to their customers as well as the amounts that have fallen due and the repayment made by the customers on a periodical basis (monthly or quarterly). CIBIL collates and aggregates this information. Thus when a customer (say Mr. Desai) approaches any bank (say Bank of Bharat) for a credit facility CIBIL is in a position to go through its own records and provide details of the existing credit facilities enjoyed by Mr. Desai to Bank of Bharat as well as his repayment history on such facilities. This enables Bank of Bharat to take a more informed decision on Mr. Desai’s credit application since it now has access to credible third party information on Mr. Desai’s existing obligations as well as his repayment history. It also benefits Mr. Desai if he has maintained a spotless repayment history since he is able to get the credit facility quickly and cheaper based on such good record. If his earlier repayment history is not so good, off course, he will find it difficult (and more expensive) to get the credit facility.

Up to now Mr. Desai could not access his own credit report. There was a rather convoluted way for Mr. Desai to get a copy of his own credit report but with this step he can get a copy of his own report by paying Rs. 142/- to CIBIL. This will help him in finding out if there are any errors in the report. A large number of consumers today feel helpless about erroneous repayment history being reported by the banks to CIBIL showing the consumer in default even where the so called “outstanding payment” is in dispute. These kinds of errors are the highest in the case of credit cards.

Since now he can have access to his own report the consumer can point out any errors in the report to CIBIL who are, under the CICR Act, required to notify the concerned bank. The erroneous entry will have to be deleted by CIBIL unless the concerned bank reverts to CIBIL within 30 days of the consumer filing his error report with CIBIL. If the consumer is not satisfied with the action of the bank in this regard he can always file a grievance before the banking ombudsman. Thus by having access to their own credit report the good consumers can ensure that they do not fall victim to erroneous reporting by the banks. At the same time consumers who delay payment for any reason will have to pay the price for such delays. Good consumers who pay their instalments will stop subsidising the consumers who delay payments. At a future point of time CIBIL may even share their proprietary credit score with the consumers for an additional fee. This score predicts customer’s likelihood of becoming a defaulter in more than 91 days within the next year. Higher the score less are the chances that the consumer will default. Any score above 700 is considered good. Having access to this score will assist the consumer in getting a rough idea of how banks view his credit standing and he can then take action either improve his credit score or if his score is already very good take care to maintain it at a high level.

So if you want to get a copy of your own credit report download the form available on the apnapaisa website at this link and fill it in and along with the required documents (mentioned in the form) and the payment of Rs. 142/- send it off to CIBIL address mentioned in the form.

This historic step needs to be welcomed with all fervour by consumers who will now no longer be helpless in knowing what banks are reporting about them to CIBIL.

I have already sent in my application to get a copy of my credit report.  I have taken great personal care to keep my credit standing immaculate but am awaiting with bated breath what my credit standing looks like as reported by the banks.

Watch this space for my comments on my own credit report.

What is a teaser loan? A teaser loan is a loan that offers low interest rates during the first two years of the loan tenure. Here the interest rates are artificially kept low in the initial few years to attract the borrowers. The borrowers get tempted to avail the teaser loan as in the initial years the EMI is comparatively low. Thereafter the interest rate soars. It is also known as ‘2/28’.

For example: A loan starts off with an interest rate of 9% for the first two years. Third year onward, the interest rate rises to 11.5%. Thereafter, the interest rate fluctuates based on the Prime Lending Rate.

The teaser loan is a risky product as the borrowers tend to default when the interest rates jump.

It is available only for floating/adjustable/variable rate loans.

The prepayment penalty is relatively high.