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RBI Cuts SLR – Cheers for New & Tears for Existing Home Loan Customers

RBI’s 1st quarter review of monetary policy on July 31, 2012 bring cheers for New Home Loan Customers and Tears for existing customers. RBI kept Key policy rates unchanged but RBI cuts SLR (Statutory Liquidity Ratio) by 1% from existing 24% to 23%. SLR is % of bank deposits to be compulsorily invested in Govt Bonds or other approved Treasury Bills. Cut in SLR implies that now banks have to keep 1% less amount in Govt Bonds / Treasury Bills thus increasing the cash in hand for lending (Increased Liquidity in the Market).

As per rough estimate, it will release approx 64,000 Crore in the system & out of this pie, SBI alone gets 10,000 Crore. SBI has decided to use these funds for Home Loan & Auto Loan (SBI’s auto loan are cheapest in market @ 10.75%). Next question coming to ur mind will be why SBI is using this money for lending and answer is, If this excess liquidity of 10k crore is not utilized for lending then it will not give any returns to SBI whereas it was yielding 7.5% in Govt Bonds. Home Loan is most secured lending and now Bank can earn almost 2.9% more interest on this money becoz the yield of Govt Bonds are only 7.5% and by lending this money for Home Loan, SBI can earn upto 10.4%.

Immediately after RBI’s announcement instead of passing benefit to existing Home Loan Customers by reducing Base Rate,  SBI cut interest rate of all New Home Loan by reducing mark up on Base rate to 0.25% for loans upto 30 Lacs and 0.4% for all loans above 30 Lacs. What it implies is that now, New Home Loan Customers can get Home Loan from SBI @ 10.25% (For loans upto 30 Lacs) and @ 10.4% (For loans above 30 Lacs). Existing customers can also shift to new interest rates but only after paying 1% conversion fees on outstanding loan.

I was watching the interview of SBI CMD on one of Business Channels and when he was asked why SBI has not reduced Base rate, which will benefit existing customers also then he mentioned that Base Rate depends on Cost of Funds and other factors influencing economy but RBI’s decision to cut SLR will not reduce the Cost of Funds & will only bring liquidity in the system therefore it is decided to cut the interest rates for new customers.

Infact, to justify the move of not reducing Base Rate an example was quoted by one of eminent CMD that “Assume sometime back Person A has bought ipad for 50k and now same ipad is available for 20k therefore person A cannot claim that now company should refund me 30k”…Through this e.g. it was hinted that existing customers don’t have any right to ask for lower interest rates which clearly shows arrogance, while dealing with existing customers. This is very ill conceived example becoz bank is not the Fund Creator but only a Service Provide. Bank is mobilizing deposits and redeploying the same for lending thus earning commission in between. Bank has to remove inefficiencies by way of frequently redeploying the deposits mobilized by bank.

Bank can mobilize deposits under 2 category (a) Floating Deposits and (b) Fixed Deposits. Floating deposit mean that interest on deposit will follow the movement of market interest rate. All funds mobilized under floating deposit should be deployed for Floating Loans and funds mobilized under Fixed deposits should be deployed for Fixed Interest rates. It will bring more transparency and efficiency in the system…All customer who are depositing or borrowing will make informed choice. Lets take an e.g., Assume in past if a customer has opted for FD @ 6.5% interest rate when interest rates were low. Bank used the same  money to lend for Home Loan @ 8.5% but now Home Loan Borrower is paying 11% interest becoz interest rates have increased but customer from whose FD the money was used by bank for lending is still getting only 6.5% therefore now bank is making cool profit of 4.5% instead of 2%. My question is why not bank increase the interest rate of customer’s FD  to 9% and retain the margin of 2% (Margin at the time of Borrowing and Lending). Bank’s only objective is to make money at cost of Existing Home Loan Customers.

All Business Channels have anticipated that shortly there will be drop in deposit rates. Last time also when RBI cut CRR, SBI revised deposit rates but till date all banks including SBI are averse to reduce Base rate. Going by a simple logic, if reduction of SLR has infused 64k Crore in the system then it implies that Banks can now redeploy these funds, which were yielding 7.5% interest in Govt Bonds and bank can now get upto 10.5% on these funds. In other words, Banks can consider that they are mobilizing 64k Cr @ 7.5% (Which is only opportunity loss).

From banks perspective, only objective is to corner Home Loan market share by reducing interest rates only for New Customers & existing customers are left in lurch to suffer.

RBI & National Housing Banks have given clear cut guidelines that all customers should be treated equally but unfortunately these are only guidelines but not directions therefore not binding on banks or HFC’s.

Almost 80% of Homes in India are bought by availaing Home Loan & its time to protect the interests of million of Existing Home Loan Borrowers by correcting this wrong practice.

Copyright © 2011-2012 Nitin Bhatia. All Rights Reserved.

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Nitin Bhatia
Nitin Bhatia
12 years ago

Dear Gaurav,

Increasing EMI & keeping loan tenure constant is not applicable in ur case. I suggested this to one of my reader who availed teaser loan and after the fixed tenure is over, his loan tenure increased therefore in this scenario, its advisable to keep tenure constant and increase EMI.

In ur case, u have taken right decision to reduce tenure and kept EMI constant.

Manish
Manish
12 years ago

Hi Nitin,

I took home loan of Rs 22 L from HDFC last year at 10.75%(floating adjustment). Currently HDFC home loan rate to new customer is 10.5% so when i asked them to change my loan rate to 10. 5 then they requested for 0.5% conversion fee.Today, SBI has proposed home loan for 10.25% so hopefully HDFC will also do the same soon.
When is the right time to pay conversion fee to avail less interest rate? If i pay conversion fee today then if tomorrow rate decreases to 10% then will they give me benefit or they will ask for conversion fee gain?
Thanks for your response in advance.

Nitin Bhatia
Nitin Bhatia
12 years ago
Reply to  Manish

Hi Manish, Regarding your Home Loan queries. I would like to add that if u pay conversion fees today and lower your interest rate to 10.25% & in future if interest rate decrease to 10% then you will not get the benefit of lower interest rate. You again need to pay the conversion fees.

Secondly, it is very difficult to say when is the right time to pay conversion fees becoz it depends on multiple factor which are totally non predictable. General thumb rule is If your remaining loan tenure is more than 5 years and you are getting benefit of atleast 2% in interest rate then its more profitable to pay conversion fees but it all depends on case to case. If u wish to know whether its beneficial for u or not then u can share you loan amount, current EMI, new interest rate after paying conversion fees & balance loan tenure.

Ashoknaagar
Ashoknaagar
12 years ago

Hi Nitin – Thanks for the insight you provide on home loans. Pls help me decide if I should go for a takeover of my home loan? I have a 24Lakhs (20 yr period, out of which 8 have elapsed) home loan from LIC. They are charging 11.65% currently and wanted to know if switching to SBI, Stand Chard etc will give me any savings? Am keen of Home saver of Stand Chard but they bank is not willling to share for how long the teaser rates will apply or for how long will I remain a new customer? They are offering a 10.25% which is 1.5% lower than LIC and am tempted to move, since this will give me savings of Rs 36K in a year for now. There would be a processing fee of Rs 5K in switching over.

Pls help me guide, if switching will provide any benefit in the long run or not?? Thanking you in anticipation.

Nitin Bhatia
Nitin Bhatia
12 years ago
Reply to  Ashoknaagar

Dear Ashok,

I request if u can share your current outstanding i.e. balance outstanding, Current EMI & also do u have any plans to pre-close or pre-pay your loan. I will be able to answer ur query in a better way if i get above mentioned information.

Sree
Sree
12 years ago

HI Nitin

I had taken a home from IDBI bank in 2008 for 45 lacs at BPLR rate,  Unfortunately my construction company did not complete the project and now IDBI bank is saying that the project is not viable and did not disburse any further installment since 2009.  Till date they have disbursed loan of 25 lacs only and i have been paying the EMI for whole 45 lacs since 2009.
1) what can i do in this situation, can i file a case against the bank, with the reason saying that due to non-disbursement i have been facing losses and resulted in non-completion of the house. How strong would the case in this regard?

2) I am also looking at the option of downsizing the loan to the current outstanding, so that the EMI will be reduced substantially.  In this situation
a) Will the bank start me charging the interest considering the loan is less than 30 lacs
b) Till date they might have charged higher interest rate, is the bank liable to refund the differential amount due to charging of higher interest rate.

Your expert advice in this situation will be highly appreciated.
Thanks
Sree

Nitin Bhatia
Nitin Bhatia
12 years ago
Reply to  Sree

Hi Sree,

As i understand, currently you are paying Pre-EMI becoz your project is not completed. Secondly, IDBI cannot charge Pre-EMI interest on Loan Amount i.e. 45 Lacs. Pre-EMI interest is simple interest which can charged on disbursed amount till date i.e. 25 Lac. Pls get it clarified from IDBI. If IDBI is charging Pre-EMI interest on complete amount then you file a case IDBI in consumer court and ask for refund of excess interest paid by you. IDBI cannot charge interest on amount, which you never availed. 45 Lac is only principal approval of amount to be disbursed. 

To answer your rest queries
1. As you have not mentioned reason for non-completion of project. If project is not completed due to any legal issue then you cannot force IDBI to disburse balance amount and IDBI is right to stop balance disbursement. If builder has not completed project due to non legal issue like fund crunch etc then also in Home Loan Agreement it is mentioned that disbursement will be linked to construction progress. I request you to check your Home Loan Agreement to check terms and conditions regarding same.

Whatever the reason from above 2 reasons. According to me your case is weak, if the reason for non completion is either of 2 reasons mentioned by me. If there is any other reason, pls let me know.  i will suggest accordingly.  

2. (a) Interest will be charged based on approved loan amount i.e. 45 lacs rather disbursed amount. 

2.(b) No, if the Interest rate is charged based on Interest rate slab of between 30 Lacs to 75 Lacs. 

Pls feel free to contact me for any other query

Thanks and BR
Nitin Bhatia

sree
sree
12 years ago
Reply to  Nitin Bhatia

 HI Nitin

Thanks a lot for the reply.  Yes you are right, the problem is with the project (Individual house) is that the developer had issue with fund crunch and also there were some legal issues, due to which the bank had stopped the disbursement.

The Bank has been charging interest on disbursed amount and they are adjusting the balance EMI amount against the outstanding principal. My current principal outstanding is 14 lacs whereas the loan amount disbursed is 25 lacs.

After all this issues, the owners had formed an association and overtook the construction activity, but still the developer is one who is building the houses, wherein int he control of funds lie with the Association.  The Association and the individual house owners has requested IDBI Bank for release for installments for the completed work. Here IDBI Bank is not doing any further disbursement, wherein the other bankers i.e HDFC & AXIS banks are doing the disbursement.  Due to which the association is not able to carry out the work on the houses for whom IDBI is the Banker.

In the current situation, i thought of downsizing the loan amount.  But the IDBI banks is saying that they will be charging the interest of 12% as mentioned in sanction letter.

I want to know the following
1) what i can do in this situation
2) Is there a way wherein i can reduce the interest rate on the outstanding loan amount.

Thanks
Sree

Nitin Bhatia
Nitin Bhatia
12 years ago
Reply to  sree

Hi Sree,

To answer your queries
1. You can downsize or prepay your loan without paying any penalty/interest rate (Irrespective of what is mentioned in your loan agreement). IDBI is only discouraging you to prepay. You may check RBI circular from following link

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7258&Mode=0 

As you have not mentioned whether your interest rate is floating or fixed. Above guideline is only for floating interest rate Home Loans. 

2. You can reduce interest rate by paying conversion fees which is normally 1% of principal outstanding. After paying conversion fees, your interest rate will be at par with interest rate offered to new customers by IDBI. You may check with IDBI regarding the same. 

Hope i answered your queries

Thanks & BR
Nitin Bhatia

Sree
Sree
11 years ago
Reply to  Nitin Bhatia

Hi got the following reply from IDBI
=========================================
    Pls find the loan details :-
 
Sanctioned : Rs.44,00,000/-
Disb           : Rs.24,82,500/-
Un Disb      : Rs.19,17,500/-
Purpose      : Plot + Construction
 
    Kindly let us know the stage of construction if you are going ahead with your own funds….so that we can analyse the situation.
 
    Secondly, as per your mail only 50% of the loan availed & if you want to restrict the loan at this stage then the loan will be converted to “Plot” loan interest rate would be 15% & 2%+ST will be levied towards charges (Charges will be debited to loan a/c upon confirmation)
 
    Kindly confirm on conversion procedure from “Plot + Construction” to “Plot”
========================================

Currently i am paying Floating Interest rate of 12%.

Apart from downsizing the loan, is there anything i can do, such as “Filing a case against IDBI and stopping the EMI.. till any solution is reached”.

Is there anyway i can talk to you personally. my email id is shanishetty@gmail.com

Nitin Bhatia
Nitin Bhatia
11 years ago
Reply to  Sree

Stopping EMI is not good solution as it can impact your CIBIL score and future prospects of availing loan. 15% is too high interest for Plot or Land purchase loan whereas others are giving land loan at max 11%.

In my opinion, best option for you is to switch your loan immediately as IDBI is taking u for ride.

If switching of loan not possible then 1st u request IDBI to convert your loan from Plot + Construction to only Construction loan rather Plot loan. Advantage is ur interest rate will remain same. 

If u exhaust all option then u can file case against IDBI in consumer forum. You don’t need lawyer to file case in Consumer forum and can file on your own. 

Ramkrishna
Ramkrishna
11 years ago

Hi Nitin ,
 
I have a House Loan with HDFC for Amount of 30 L. Till date 26.5 L has been disbursed  to the builder.I have taken full EMI option.Also I have made prepayment of 1 L last year. My current outstanding is 23.5L.
The floating Interest rate currently applicable for my Loan is 10.75%.HDFC is offering to reduce my interest rate to 10.25% by paying a conversion fee of 7500/.
My question here :
Should I pay this amount and get my Tenure reduce ?
What happens if by end of december 2012 the HDFC Bank decide to reduce the interest rate to 10% for all the customer.Will in that case my payment of 7500/ will be waste as my interest rate are getting reduce to 10% ??

Thanks ,
Ramkrishna

Nitin Bhatia
Nitin Bhatia
11 years ago
Reply to  Ramkrishna

I will not recommend to pay conversion fees and reduce tenure becoz financially you will not gain at this stage. 

If tomorrow HDFC reduce interest rate for all customers then ur interest rate in current scenario will reduce to 10.5% from 10.75% whereas if u pay conversion fees and ur interest rate reduce to 10.25% then your interest will be 10% in Dec’12. Gap of 0.5% will always be there becoz it is the gap in ur current spread & spread being offered to new customer. 

Your current spread is 5.75% & if u pay conversion fees then your spread will be 5.25%. If HDFC reduce interest for all customers then they will not increase spread of all customers but reduce their BPLR. Your spread will remain same. Hope i answered your query

Vikram
Vikram
11 years ago

Hello Nitin

Felt good to read your responses.
I have also taken a home loan from HDFC of approx 23 lakhs in Nov 2011 at a rate of 10.5% (floating). Want you to ask that bank is demanding a conversion fee of 0.25% on outstanding amount for a less rate of 10.25%.
1. Is it legal to ask for conversion amount?
2. If asked should I cut down my tenure or EMI amount.

Thanks in advance.
Vikram

Nitin Bhatia
Nitin Bhatia
11 years ago
Reply to  Vikram

Hi,

To answer your query
1. Yes, its legal becoz in your loan agreement they must have clearly mentioned that spread will be fixed through out the tenure and will be linked to BPLR therefore if u wish to reduce interest rate then u need to reduce spread thus u need to pay conversion fees.
2. You should cut down tenure rather EMI

Tks & BR
Nitin Bhatia

Ankur Kapoor
Ankur Kapoor
11 years ago

Hello Nitin,

I had taken my homeloan of Rs. 20 lac @9 % floating from IDBI on September 2009. Right now its around 17 lac is pending. I am currently paying my EMI Rs. 24,000/- @11.25. Please advise me on the following :

1. Should I pay the conversion fee of 0.5 % and reduce the rate to 10.25 % which eventually reduces my tenure by say another 8-10 months .

2. Is it wise now to increase my EMI to 35,000/- and reduce the tenure further more ? Or should I be keeping the lump sump amount invested somewhere else and then do the part pre-payment ?

Nitin Bhatia
Nitin Bhatia
11 years ago
Reply to  Ankur Kapoor

1. You will not gain much by paying conversion fees at this stage.
2.Its wise to increase EMI. If your existing investment is giving you return of more than 11.25% (current Home Loan interest rate) then u keep invested else its better to clear Home Loan first. Reason you are paying more interest then you are earning on ur investment

Nishant Chandra
Nishant Chandra
11 years ago

Hi Nitin !
In my case loan sanctioned under construction linked program is 8,20,000. Amount disbursed is 5,54,000. Current interest rate is 11.65 . Amount demanded by bank to convert it to 10.15 is 3900. Should I wait for interest rate to go down further or pay conversion fee now? Any guess what will be interest rate after 6 month?

Nitin Bhatia
Nitin Bhatia
11 years ago

i have answered this query

Santosh
Santosh
11 years ago

Hello Nitin,
Thank you for these wonderful articles regarding Home Loans.
Here is my query!
Planning for a Home Loan of 24lakhs for 15years & i have below offers…
LIC:
10.25% Fixed for 2years
10.95% Fixed for 10years
HDFC:
10.50% Fixed for 15years

I am inclined more towards HDFC assuming that the ROI is Fixed for complete tenure! Is this a good thing to take loan fixed?
If i take loan from LIC fixed for 2years, im afraid they would hike up the ROI to 12-13%(this is based on a friends Home loan who took LIC loan for 8.25% 2years back & now he had ROI @ 11.75%)

What would you suggest?

Nitin Bhatia
Nitin Bhatia
11 years ago
Reply to  Santosh

You may go ahead with HDFC…I will not recommend Fixed load as ROI is dropping

Gaurav Metkar
Gaurav Metkar
12 years ago

Dear Mr.Nitin.

First of all thank you very much for posting such a complicated information in such a simple language.Really appreciate your efforts on this.

I would like to have your advice on my home loan pre-payment.

I tool a home loan of 17.5L @ 10.5 from ICICI in May 2012 for a period of 20 years. My EMI is Rs.17472

Yesterday i paid a lump-sum amount of 6.75L. After this, my outstanding EMI’s are only 89 !! (Based on my research on this, I was well aware that the sooner you pre-pay, maximum is the benefit)

Somewhere above you have mentioned that, try to increase the EMI and keep the loan tenure constant. In my case, will it beneficial to increase the EMI such that i get maximum benefit out of this.

Many thanks in advance !!
Gaurav

Shashikumar H
Shashikumar H
8 years ago

Hello Nitin,
I have taken loan in LICHFL in 2011 @ 9.9% Interest, as of now they are charging me @ 10.35 Interest. When i questioned they say they will revise to 10.2 if i pay some money. SBI is offering loan at 9.55%, should i opt to take over from LICHFL to SBI? What is your suggestion.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Shashikumar H

You may transfer to SBI.

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