Corporate reputations for fair play can be fluff when regulators sleep
A 19 October, 2011 circular of the National Housing Bank says no penalty or fee for prepayment of home loans can be charged, provided the interest rates are floating and not fixed. The NHB is the regulator for housing finance companies like Housing Finance Development Corporation. Banks also lend home loans. They are governed by the Reserve Bank of India. On June 5, 2012, the RBI abolished prepayment fee on floating interest rates, to give old borrowers an escape chute from predatory banks.
HDFC is a pioneer. It has enabled hundreds of thousands of Indians to own homes. It enjoys a reputation for fair play. Its top managers sit on government committees and their advice on policy is sought by our political leaders. What then is one to make of this notice in HDFC branches that customers must submit a six-month bank statement before foreclosing their loans? Such a statement would be necessary to identify where the money for foreclosure came from.
But the NHB circular says that floating interest loans can be pre-closed through any source. Where interest rates are flexible, and lenders can reset the rate, there is no danger of asset-liability mismatch as in fixed interest loans (which, the NHB says, can be prepaid only with own funds, and not by borrowing from competitors who charge a lower rate).
When asked how she was demanding a bank statement when a floating interest loan was prepaid, the customer service executive at HDFC's Noida Sector 18 branch said, 'it is a regulatory requirement!' The executive was either knowingly misleading her customer, or was herself misled by her minders.
That HDFC could display a notice without fear of censure shows the authority that our regulators command and the diligence they exercise to protect customers. It is a common practice among lenders, including HDFC, to charge old customers more than new ones. This is obviously discriminatory.
The NHB should have cracked down on this on its own. That it has been sleeping on the job is clear from another circular also issued on 19 October, 2011, which says that it has received many complaints in this regard. First of all it should not have waited for 'many' complaints.
And when it got them what does NHB do? It urges the lenders to be good and charge uniform rates provided the old and new customers have the 'same credit/risk profile,' thereby allowing them to extort like before.
You can be as diligent in repayment as possible. If you are an old customer you will be damned (which means all borrowers, because a new customer cannot remain new forever). The only way to secure lower rates is by paying a conversion fee.
A higher fee will expand the gap between the so-called RPLR (retail prime lending rate) and the rate you pay; a lower fee will contract it. Prime lending rate by definition is the rate that the best borrowers can secure; so it should be the lowest. But RPLR is the maximum! That is transparency for you!
With dumb regulators like NHB and thick-skinned ones like the Reserve Bank of India, retail customers are pretty much left to their own devices while the banks play games with rules. RBI Governor KC Chakarabarty said private banks (HDFC Bank, ICICI Bank and Axis Bank) may have done 'traffic rule violations' and 'no accident has taken place,' in response to Cobrapost's expose of bank executives offering to help customers dodge the law and recycle cash deposits without insisting on income tax permanent account numbers (PAN) or following KYC (know your customer) norms.
Chakrabarty is perhaps unaware of the 'broken windows' theory. I can define it no better than a writer in Huffingtonpost.com: small acts of deviance -- littering, graffiti, broken windows -- if ignored, will escalate into serious crime.
By practicing this theory Mayor Rudy Guiliani made New York's streets safe. Our regulators must learn (to have pride in their calling) from Preet Bharara, the Manhattan federal prosecutor who secured a prison term for former Mckinsey chief Rajat Gupta on insider trading charges.
When their allegiance is to the law, our regulators will recognize that reputations can camouflage unethical behaviour. Just because you were good in the past does not mean you are. Trust but verify.
More about Vivian FernandesVivian Fernandes is a senior journalist with nearly 30 years of practice, 19 of them in television, all of which he spent at TV18. Vivian’s last assignment was as executive editor of a book on India and China written by the founder of the Network 18 group, Mr Raghav Bahl. He has been an observer of Indian business and politics, and had reported on economic policy making as reporter, chief of Delhi bureau of correspondents and economic policy editor. Vivian has traveled abroad with Prime Ministers Narasimha Rao, Atal Behari Vajpayee and Manmohan Singh. He was also reported on the World Trade Organization’s trade talks from Cancun, Hong Kong and Geneva. He continues his association with the Network18 group, but not as an employee.
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