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Floating rate loans to become more transparent

October 07, 2009 12:55 IST

In a way the global economic slowdown has come as a blessing in disguise for the banking industry. This industry is now getting more transparent thanks to the series of efforts from the Central banks in countries across the world that has resulted in lot of corrections on its own system.

One such big effort is aimed towards ensuring transparency in the floating interest rate home loans besides empowering the customers to get more info from banks.

Current status of floating rate loans on borrowers

Till recently, the customers of home loans whose interest are charged on a floating rate basis were almost blindfolded to the calculations linked to the rates. They had no idea whatsoever on what basis the banks changed their floating interest rates or when these rates would change!

The home loan statement was the only de facto document they could refer to about the changed rates. On the other hand, the bank had a free hand in determining the change in the floating rates based either on the bank's floating prime lending rate or PLR or its own internal rate.

Relax! All this is set to change thanks to the recent efforts by the Banking Codes and Standards Board of India. The BCBSI, which currently has 79 banks as its members including most commercial banks is an initiative jointly promoted by the country's central bank, the Reserve Bank of India and the Indian Banks' Association.

New measures recommended by BCSBI

According to the latest move proposed by BCSBI, the member banks affiliated to the board would have to make public the reference rate to which its floating rate loans are linked to.

Further, the board has asked the banks to publish any changes made to the same, that is inform the customers of home loans under floating rate of interest. They would also be required to publish their reference rates on their websites whenever there is a change apart from displaying the same in their various branches.

Not only this, the BCSBI's move could empower the customers to get more info from the banks whenever there is an option to convert a fixed rate loan to a floating rate loan or vice versa.

And in case of fixed loan rates that have a reset clause, which would allow the banks to change the fixed rate according to the prevailing interest rates in the market and on different dates, the banks would be required to inform the customers on the same.

This move is seen as an effective way to bring in the much needed transparency in the calculations of floating rate of interest on home loans. And since most banks are members of the BCSBI this directive would effectively apply to almost all banks.

Other transparency measures by the BCSBI

Apart from the measures linked to changes in floating rates on home loans, the BCSBI has also announced many other transparency measures that could benefit the customers.

For instance, whenever a customer opens a fixed deposit the banks would be required to explain the income tax implications of interest income earned from the deposit. And if there is a complaint from the customers, the banks would need to act on it within 30 days.

For its credit cards and loans customers, the banks would be required to spell out in short and precise terms the "Most important terms and conditions", or MITC. Not only this, the new rules would make it mandatory for the banks to make public on its websites the policies regarding collection of cheques, collection of dues, besides a chart on the various other charges levied on its customers.

And in case an account remains inactive for a stipulated time, banks would now be required to inform the joint account holders of these accounts before they are categorized as a dormant account or an inoperative account.

Finally, when there is a full repayment of a home loan, the banks should return, within 15 days, all documents such as title deeds, and other mortgage related documents to the borrower.

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