If you keep deposit with a bank, it may not offer you indiscriminately higher or lower interest rate than it offers to other depositors. But when you visit a bank as a borrower, it may offer you loan on terms different than those offered to other borrowers. Nonetheless, the Reserve Bank of India (RBI) seems concerned over discriminatory practices and has come down heavily on banks charging different interest rates on loans to customers with similar profiles.

The central bank in order to study credit pricing has formed a working group to suggest stringent norms in order to make loan pricing more transparent and have in place an appropriate credit pricing under the floating rate regime. Moreover, it has suggested host of other measures which are intended to improve transparency and lead better customer satisfaction.

Following are the notable recommendations given by the working group, amongst host of others:
 

• It would be desirable for banks whose weighted average maturity of deposits is on the lower side, to adopt a practice of computing base rate on the basis of marginal cost of funds
   
• Banks should have a board approved policy of credit pricing and the board needs to ensure that discrimination done by the bank is in accordance to credit policy of the bank factoring in risk-adjusted return on capital. Banks should set internal policies for deciding the range of difference in the interest rates.
   
• Banks should not raise interest rates immediately when there is a change in the base rate, which is the minimum lending rate for a bank. Floating rate loans may have a pre-fixed mandatory reset dates, say, quarterly or half yearly. Importantly, spread (difference between the rates charged to the customer over and above the base rate) cannot be increased unless the risk profile of the borrower worsens. Moreover, there be no distinction between an old customer and a new customer with similar risk profiles.
   
• There may be a sunset clause for Benchmark Prime Lending Rates (BPLR), so that all the contracts are thereafter linked to the Base Rate. Banks may ensure that these customers who shift from BPLR linked loans to Base Rate loans are not charged any additional interest rate or any processing fee for such switch-over.
   
• Indian Banks’ Association (IBA) may develop a new benchmark for floating rate loan products. To begin with, such benchmark rate would be used only for home loans.
   
• The benefit of interest reduction on the principal due pre-payments should be given on the day the money is received by bank without waiting for the next Equated Monthly Installment (EMI) cycle date to effect the credit.
   
• Banks should publish information with regards to interest rates and fees on their website. It should be made mandatory for banks to disclose the interest rate range of loans disbursed in the past quarter along with the average and median of interest rates.
   
• Banks may follow standard format for credit agreements and should provide to all borrowers a clear and concise one page summary of key facts.
   

Why do banks discriminate?

It should be noted that, customer relationship, competitiveness of the bank and its business strategies, play a role in adopting discriminatory practices.

To stay profitable, banks need to rightly set the interest rate on loans as well as on deposits. Spread between these two rates is banks’ earnings. This spread is not same for all banks. It differs from banks to banks. Factors that affect the spread are:
 

• Cost of funds (i.e. cost of deposits to the bank)
• Tenure of a loan
• Risk profile of the borrower
• Customer relationship
• Competition
• Business strategy
   

PersonalFN believes that if aforesaid recommendations are accepted loan pricing would become more transparent and arbitrary discrimination between two borrowers of a similar risk profile may soon stop or at least, reduce substantially. In times of fierce competition, banks adopt various strategies to attract new customers. But with introduction of standardised disclosure norms on credit pricing, biased discrimination may stop. This would instill greater transparency and may result in customer satisfaction. Also for banks, adopting prudent credit pricing would improve asset liability management.

Have you been a victim of such discrimination at a bank? Share your views here.

Add Comments

Comments

rengarama93@gmail.com Apr 14, 2014 It is true that there is discrimination in fixing the rate of interest on borrowers, Especially , when big corporates are approached for new/existing business- either bulk deposits or bulk borrowings  or for a switch over from other bank, it is the corporate -who dictates terms and rate of interest.  Finally , the boards have to come down and agree to lower the interest on borrowings other than reduction/waiver in other service charges etc,  Hence the cost of funds increases and the banks are not able to offer even small concession on small borrowers !  It is better -therefore , a transparency in mechanism is in place making  other borrowers and banks  benefited !

 1