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Customer loyalty and good payment record could help reduce the interest rate on your home loan

Vivekjyoti Gupta (40), a graphic designer based in Malad, Mumbai, was determined to do something about his home loan as he had seen the interest on it go up by around 5% in the recent past. He went to his bank to enquire about the outstanding principal amount on his home loan, as he was thinking of making a part-prepayment to bring down his monthly outgo. However, Gupta was in for a pleasant surprise: the bank official offered him an option to reduce his monthly loan payout. The official told him that though his current interest rate was around 12.5%, he had the option of reducing it to 11% by making a one-time payment of 0.5% on his outstanding loan amount.

"I had taken a loan in 2005 end when the rate of interest was something around 7.5%. But over time, the bank had increased it to 12.5%. Even when the bank was offering home loans with lower interest rates to attract new customers, our rates were never lowered," Gupta said. Gupta informed that just by paying a small sum, he would be able to save a huge amount which would help him in prepayment of the loan.

"When I asked the official why is the bank being so kind to me. The official told me that since I was one of their prompt customers, they are trying to reduce my interest burden," he said. Gupta also added that another customer who was present in the bank had told him that many of the existing customers have been shifting since the past few months to other banks offering lower rate of interest, hence the bank could be offering the incentive to retain them. According to Satkam Divya, chief executive officer and managing director of rupeetalk-.com, a financial portal, there are lots of reasons for the banks to adopt such initiatives.

"Banks adopt these schemes as apart of their retention strategy for old customers. One strong source of funds for the banks is the repayments made by the existing customers," he said. Also, with the interest rates going up, there is also an increased propensity of these old customers defaulting on their monthly payments. "This could lead to an increase in the non-performing assets for the banks, which they would not want. So, by reducing the interest rates, they are, in fact, reducing the chances of default by these customers," he pointed out. Divya also stated that there is a possibility that rival banks could lure these same customers with attractive lower interest rates. "So the bank may as well offer to reduce the borrower's interest burden and retain him," he said.

According to Ramesh Bhojwani, a banking consultant, not everyone is eligible for such a reduction in the interest rates, as banks generally keep a criterion for the same and the reduction in rates too differs from banks to banks. "Firstly, borrowers with large ticket sizes generally get in a larger reduction in the interest rates which may range anywhere from 1.25% to 1.75%. The customers with lower loan size may have to be satisfied with a lower reduction, which could be anywhere between 0.75% to 1%," he said. Bhojwani also added that customers who are paying a higher rate of interest are generally offered substantial relief as compared to the rest.

"Another criterion is the credit history of the customer. A customer who has been regular in his interest payments and has a good payment track record gets in a decent reduction in the interest rates," Bhojwani informed. Also, if the bank feels that there is a possibility that the existing customer has the potential to generate more business for them in the future like top-up loans or other loans, then the bank may prefer to pamper such a customer with lower interest rates, he said.

According to Bhojwani, the processing fees that the banks charge for such a reduction differs from bank to bank. "While some banks charge around 0.5%, others charge around 1%. There is no fixed rule on how much the bank can charge, if the customer wants, he can even try negotiating on the processing charges and if he is lucky, he can get a decent discount, there too," he pointed out.

Bhojwani added that at most of the times, the reduction in the rates may not get him at par with the new borrower but however ensures that in case he decides to shift to some other bank, it could be a costlier proposition for him. "For example, if other banks offer around 10.5% to new customers, and the borrower is getting his interest rates lowered to just 11 or 11.5%, it still makes sense for the borrower to stay at the current bank as he would have to incur lots of expenses for shifting like foreclosure charges of the current bank and processing and other charges for the new bank," he said.

Even the Reserve Bank of India in the past had called for greater transparency in dealing with the existing customers and even advised passing on the new loan rates to its existing customers, rather than restricting it just for new clients. It had in the past even send in an advisory to Indian Banks Association. A senior official from the State Bank of India (SBI) informed that it is not possible for the banks to offer such options to all the old customers.

"A product pricing at any given point of time is decided with factors like the position of asset and liability in the bank at the time and cost of funds. However with time, the product could be cheaper or costlier to the new customers. If we offer such incentives to old customers with the reduction in the interest rates, then even old borrowers who are enjoying higher interest rates on their deposits as compared to new ones would need some tweaking," he said. The SBI official, however, informed that their bank also has a policy where in they can also offer to reduce the rates of interest of old customers. "If a customer has a very good payment track record, and has been a loyal bank customer for more than 15 years, we can be selective and offer him some reduction in his interest rate burden. But however it is not open for everyone," he said. According to Kamlesh Rao, executive vice-president and business head of personal finance & mortgages, Kotak Mahindra Bank informed that their bank doesn't have any scheme offered to customers wherein he can reduce his interest rate burden.

"However if the customer is genuine and has been banking with us for a very long time and had all his savings and business accounts transacted through us, we think we can make an exception for such a customer as a one of a case," he said.

Source : http://epaper.timesofindia.com/