RBI to banks: Pass on low loan rates to existing borrowers

Excerpts from What's Hot on CNBC-TV18 Watch the full show » RELATED NEWS RBI's new provisioning norms cheer ARCIL RBI extends timeframe on loans to mutual funds RBI may bring down credit growth target from 18% Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty?

The Reserve Bank of India (RBI) has advised banks to pass on the benefits of lower interest rates to existing home loan customers. The central bank has also advised banks and Credit Information Bureau (India) Limited or CIBIL to resolve customer issues related to faulty credit reporting.

In an interview with CNBC-TV18, G Jaganmohan Rao, Customer Services Head and Chief General Manager, RBI explained why home loan complaints have been on the rise and why banks are not disclosing mutual fund commission to customers.

Here is a verbatim transcript of the interview. Also watch the accompanying video.

Rao: The complaints on home loans are on account of two reasons; one is that the product is complex.

Q: Is it complex or has it been made complex?

A: It has always been made complex, it can be made simple. It is a kind of marketing.
The other part is that customer is in a hurry to clinch the deal when the interest is on a particular name. So let us say that the interest rates are stable now, so customer would opt for fixed interest rate of interest.

When the interest is going down, he might feel that he should have gone for floating rate. That is the dilemma. But then he should read the conditions carefully whether the fixed rate he has entered into with a particular bank is fixed to the tenure or is it subject to a revision of two-three years. So one can bargain with the bank if he wants. All housing loans are tailor-made to suit particular sections.

Q: Are you saying that all the problems are because customers are not reading agreements properly or do you think there is scope also for making some simplicity in these agreements or in these products, are you taking a finer, closer look at these products, you said they are complex?

A: One is, to move towards a simpler home loan product. The second thing is telling the customer upfront what these clauses are.

Q: Are home loan problems covered under ombudsman as well?

A: Home loans are covered under the ombudsman.

Q: Have you seen increasing cases there?

A: Off late, there is an increase in the number of complaints as far as home loans are concerned. More complaints relate to the existing customers asking us why the interest rate decrease is not passed on to us.

Q: The existing ones have a problem because all new rates seem to be offered only to the newer entrants? You think that is the right thing?

A: We have been talking to the Indian Banks Association (IBA) and other banks saying that you should make it clear to the customer. There is also no reason why the benefit cannot be passed on to the existing customers. But the banks have been telling us that they are working out. Some banks have already started passing on the benefits like Axis Bank and others. So other banks will follow suit.