The document discusses the challenges faced by existing home loan customers, particularly regarding discrimination in interest rates between new and existing borrowers. It highlights the regulatory issues between commercial banks and housing finance companies (HFCs), leading to existing customers often paying higher rates. Recommendations are provided for both existing and prospective borrowers on how to navigate these challenges, primarily through loan transfers to banks that operate under a base rate system.

1. Home Loan -
Unfolding the Mysteries
Prepared by Subrata Dey
Dec 2015

2. Present Home Loan Rate (Dec 2015)
Prepared by Subrata Dey 2
Av. is around 9.60% (Market
Rate), What would be your
basis to select the lender?
1. Lowest Interest Rates & Lowest EMI per lakh
2. Zero Processing and administrative charges
3. Pre approved project by financing
company/bank
4. Quick Approval /Corporate offer/Friend’s
Advice?

3. Sam
• In mid 2013, he borrowed Rs 38 lakhs @
10.50% (Floating Rate) for 20 years from
one of the most reputed home financing
corporation of the country.
• Off late he noticed he is paying more
interest than the relatively new customers.
• He called up his lender and they demanded
nearly Rs 20,500/- as the “Conversion
Charges” to reduce the interest rate.
• He is worried now, he has to continue with
the high interest till his next bonus and
appraisal cycle.
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If it Sounds familiar, you are not alone.

4. He discussed the issue with his colleagues and
the findings were quite disturbing:
 A few of his colleagues were not even aware
of their latest interest rates, they have too
much of project works. His project manager
Mr. Ignorantly Busy is one of them.
 A few of the them have already paid the
“Conversion Charge” to lower their interest
rates and even now they are at higher level
than new customers.
 One of his colleague Mr. Fore Closure , who
took the loan in 2007 has recently fore closed
the loan after paying 5 “Conversion Charges”
during last 5 years. Prepared by Subrata Dey 4
Sam

5. • Did he and his colleagues missed
something, somewhere?
• Why were they being discriminated
with new customers?
• Whether transferring the loan to
other lender will resolve the issue?
• How to avoids these discrimination
charges forever?
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These questions were troubling Sam.
Sam

6. Sam’s Research
• Sam started his research work to unravel
the mystery of Discrimination &
Conversion Charges.
• He used the most authentic and reliable
source of information – “The Internet”
• While Googling with “Housing Finance”
two following news items of 20th May,
2013 & 31st Oct 2015 caught his
attention.
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7. Sam’s Research
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8. Sam’s Research
• The then Chairman of SBI Mr. Pratip
Chaudhuri opined that there should be a
single regulator for all home loans
provided by both Banks and Housing
Finance Corporations (HFC).
• Currently two different regulators are
there, RBI regulates home loans
provided by commercial banks (CB)
while HFCs like HDFC Ltd, LIC HFL etc are
regulated by National Housing Bank
(NHB).
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20th May 2013 Highlights

9. Sam’s Research
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Regulates all the commercial banks

10. Sam’s Research
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Regulates all the housing finance corporations

11. Sam’s Research
• Ms Arundhati Bhattacharya, Chairman of
SBI said RBI’s regulatory arbitrage has
created Un-level playing field between
Commercial Banks and HFCs.
• HFCs like HDFC Ltd, LIC HFL etc can lend
sub- RPLR (Retail Prime Lending Rate) to
new customers without even reducing the
PLR and thus existing customers suffer.
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Mr Sriram Kalyanaraman, MD & CEO of National Housing Bank
defended the HFCs by stating that the cost of funds for HFCs are
more than commercial banks and they can lend sub- PLR.
31st Oct 2015 Highlights

12. Sam’s Research
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These two articles provided him the invaluable insight into the
mysterious discrimination charges for existing borrowers.

13. Sam got the answers to all questions that were
troubling him.
• Did he and his colleagues missed something,
somewhere? – Yes, they were lured by attractive
interest rate and reputation of HFCs.
• Why were they being discriminated with new
customers? NHB allows the HFCs to let sub –PLR
to attract new customers.
• Whether transferring the loan to other lender will
resolve the issue? No, transferring to another HFCs
will not resolve the issue.
• How to avoids these discrimination charges
forever? Transferring the loan to a bank regulated
by RBI will prevent it.
Prepared by Subrata Dey 13

14. BPLR (Benchmark Prime Lending Rate) or
RPLR (Retail Prime Lending Rate)
 BPLR or RPLR is the minimum rate at which
banks extend credit to it's top most customers. It
was introduced in the year 2003 to price bank
loans on the actual cost of funds.
 However over a period of time banks started to
give spread (discount) to customers and the
system became opaque (beginning of
discrimination). To attract new customers they
offered more spread to them than their existing
customers.
Prepared by Subrata Dey 14

15. BPLR (Benchmark Prime Lending Rate) or
RPLR (Retail Prime Lending Rate
 It also resulted in another problem: Bank Interest
Rates ceased to respond to monetary policy changes
that the RBI introduced periodically i.e. IT BECAME A
VEHICLE WITHOUT REVERSE GEAR. While they were
quick to hike BPLR or RPLR in line with RBI rate hikes,
they hardly reduced the rates during the downward
cycle.
Prepared by Subrata Dey 15

16. BPLR or RPLR
Let’s look at the BPLR/RPLR of some leading HFCs
RBI was in the tightening mode till Mid of 2013 or so and Bank’s
and HFC’s interest rates were at peak.
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PLR was 12.5% in the year 2006
Thereafter RBI has been easing rates consistently. In 2015 alone it has
cut the rates by 125 basis points (100 basis points =1%)
In reverse gear, our speed is
too slow, from peak of 16.75%
to 16.30% in two years.

17. BPLR or RPLR
Let’s look at the BPLR/RPLR of some leading HFCs
Prepared by Subrata Dey 17
We believe in forward movement only. Reversing is not our GOAL.

18. A short Introduction to “Spread”
BPLR or RPLR is the minimum rate
at which banks extend credit to it's
top most credit worthy customers.
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But at 15 to 18% rate no one was
willing to take the loan. So they
applied the “Buttering Concept” to
the very privileged customers.
You are very special customer to us,
we will provide a discount of “s”
over our PLR and quite naturally
they call it “SPREAD”.

19. A short Introduction to “Spread”
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HDFC’s current spread is 6.8% for
women & 6.7% for men.
Interest Rate= RPLR –Spread
9.5 = 16.3 – 6.8
Indiabulls current spread is 8.75%.
Interest Rate= RPLR –Spread
9.55 = 18.3 -8.75

20. Mr. Ignorantly Busy’s Loan Details
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21. Mr. Ignorantly Busy’s Loan Details
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22. 2009 2010 2011 2012 2013 2014 2015
New Customer 9.5 10.25 10.75 10.5 10.25 10.05 9.6
Mr Busy 9.5 10.5 11.5 11.5 11.75 11.75 11.3
0
2
4
6
8
10
12
14
InterestRates
Year
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Mr. Busy Interest Rate shoot up to 11.75% (16.75-5)during
Dec 2013 and came down to 11.3 (16.3-5)
Mr. Ignorantly Busy’s Loan Details
New customers were
offered home loan at
prevailing Market Rate
Spread was increased
from 5 to 6.8 gradually

23. Prepared by Subrata Dey 23
Mr. Busy was paying Rs 31,500/- as the EMI instead of Rs 27,871/- and
you can always do that, if financially possible for you.
Mr. Ignorantly Busy’s Loan Details
Year Rate Interest Principal
Balance
Loan
2009-10* 9.5 310776 67224 2922776
2010-11 10.5 340824 37176 2885600
2011-12 11.5 329332 48668 2836932
2012-13 11.5 330854 47146 2789786
2013-14 11.75 325006 52994 2736792
2014-15 11.75 318433 59567 2677225
2015-16** 11.30 234026 49474 2627749
*Full disbursement was on Mar 2009, EMI started from Apr 2009
** Upto Dec 2015 EMI
Mr. Busy paid Rs
3,78,000/- per annum
from 2009-10 to 2014-15
(31500x12) and 2,83,500
(31500x9) in 2015-16.

24. Prepared by Subrata Dey 24
If Mr. Busy’s rate were also reduced to the level of the New Customers
by HDFC (Say due to regulator’s compulsion).
Mr. Ignorantly Busy’s Loan Details
Year Rate Interest Principal
Balance
Loan
2009-10* 9.5 279849 98151 2891849
2010-11 10.25 292470 85530 2806320
2011-12 10.75 297804 80196 2726124
2012-13 10.5 281696 96304 2629820
2013-14 10.25 264314 113686 2516134
2014-15 10.05 246944 131056 2385078
2015-16** 9.6 168081 115419 2269569
Discrimination charges is the difference of Balance Loan on
both cases and worked out to be Rs 3,58,180/-
Mr. Busy paid Rs
3,78,000/- per annum
from 2009-10 to 2014-15
(31500x12) and 2,83,500
(31500x9) in 2015-16.

25. Prepared by Subrata Dey 25
Mr. Fore Closure’s Loan Details

26. Prepared by Subrata Dey 26
Mr. Fore Closure’s Loan Details

27. Prepared by Subrata Dey 27
Mr. Fore Closure’s Loan Details

28. Mr. Fore Closure’s Loan Details

29. Prepared by Subrata Dey 29
Mr. Fore Closure’s Loan Details
Mr Fore colusre paid nearly
Rs 92,000/- (10% of the
loan amount) more due to
higher interest rates (than
new customers) and
conversion charges.

30. Base Rate System
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To protect the suffering of existing customers RBI
implemented Base Rate System for Banks.

31. Base Rate System
Prepared by Subrata Dey 31
From 2003 onwards (introduction
of RPLR system) commercial
banks as well HFC were using the
same strategies to maximise their
profit.
Discrimination was the norm and
existing customers were suffering.
From 1st July 2010, RBI
implemented the Base Rate
System for all Commercial Banks.

32. Base Rate System
Prepared by Subrata Dey 32
Banks are not allowed to lend
below their base rate. (A few
exceptions are there i.e. bank’s
own employees etc)
Banks can charge a spread above
their base rate. Spread varies for
type of loan i.e. home loan, car
loan, personal loan etc

33. Base Rate System
Prepared by Subrata Dey 33
Axis Bank ICICI Bank SBI
0.75% reduction from peak 0.65% reduction from peak 0.70% reduction from peak

34. Sam’s Research
Prepared by Subrata Dey 34
• Ms Arundhati Bhattacharya, Chairman of SBI said RBI’s
regulatory arbitrage has created Un-level playing field
between Commercial Banks and HFCs.
• HFCs like HDFC Ltd, LIC HFL etc can lend sub- RPLR (Retail
Prime Lending Rate) to new customers without even
reducing the PLR and thus existing customers suffer.
Mr Sriram Kalyanaraman, MD & CEO of National Housing Bank
defended the HFCs by stating that the cost of funds for HFCs are
more than commercial banks and they can lend sub- PLR.

35. Present Home Loan Rate (Dec 2015)
Prepared by Subrata Dey 35
Base Rate: 9.30%
Base Rate: 9.35%
Base Rate: 9.50%
Base Rate: 9.75%
RPLR Based
RPLR Based
RPLR Based
RPLR Based
Base Rate: 9.65%
Base Rate: 9.70%
1. Av. is around 9.60%
(Market Rate), How HFC’s
whose cost of fund is more
according to NHB, CEO are
offering same rate?
2. What will happen if
any aggressive player reduces
the Home Loan rate to 9%?
3. What will happen in
case of another cycle of rate
hike by RBI?

36. Present Home Loan Rate (Dec 2015)
Prepared by Subrata Dey 36
Base Rate: 9.30%
Base Rate: 9.35%
Base Rate: 9.50%
Base Rate: 9.75%
RPLR Based
RPLR Based
RPLR Based
RPLR Based
Base Rate: 9.65%
Base Rate: 9.70%
1. Av. is around 9.60%
(Market Rate), How HFC’s
whose cost of fund is more
according to NHB, MD are at
nearly same rate?
Customers looks for the
interest rate only without
getting into the details. No
customers will borrow from
HFCs if they offer home loan
at higher rates than banks.
This is the TRAP.

37. Present Home Loan Rate (Dec 2015)
Prepared by Subrata Dey 37
2. What will happen if any aggressive
player reduces the Home Loan rate to 9%?
Banks can offer home loans at 9% only by
reducing their base rate to at least 9%
All customers will be get the benefit of rate
cut, banks profit margin will decrease. In
case they don’t reduce the rate they would
lose customers to other banks. 9% will be
the new Market Rate.
HFCs will simply increase the Spread
without reducing their rates.
Only new customer will get benefit.
HFCs will continue to earn more
from Discrimination and
Conversion Charges. This way
there are recovering their higher
cost of funds and maximizing the
profits.

38. 20xx 20xx 20xx 20xx 20xx 20xx 20xx
Banks 9.5 10.25 10.75 10.5 10.25 10.05 9.6
HFCs 9.5 10.5 11.5 11.5 11.75 11.75 11.3
0
2
4
6
8
10
12
14
InterestRates
Year
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Banks all customers will
be at nearly same rate.
Banks Vs HFCs
What will happen in case of another cycle of rate hike by RBI?
Without Regulation,
HFC Customers will
continue to bleed
The only way to prevent it is by bringing HFCs to a base rate system.
Imaginary Values
Probable trend during the next rate hike cycle by RBI

39. Prepared by Subrata Dey 39
Recommendations
A. Existing HFC Customer:
 Paying conversion charges is not the option. In
absence of regulator they will continue to
exploit the situation.
 Look for the offers, many banks are offering
“zero” processing fee for loan transfer.
 Transferring the loan to a Bank with Base
rate system is the best option. The spread
above base rate should be minimum, and
preferably “ZERO” if possible.
 Once your are close to the base rate, Market
forces will take care of the your interest rate.

40. Prepared by Subrata Dey 40
Recommendations
B. Existing Bank Customer:
 For Loans prior to 2010 (before base rate
system), the spread is likely to be higher. May
be between 1.5 to 2%. For Loans after 2010,
the spread is likely to be around1.5% or less.
 Try to negotiate with your bank for the
ongoing spread (0.0 to 0.25) without paying
the conversion charges. If not possible look
for the offers, many banks are offering “zero”
processing fee for loan transfer.
 The spread above base rate should be
minimum, and preferably “ZERO” if possible.

41. Prepared by Subrata Dey 41
Recommendations
C. Prospective Borrowers
 Borrow from banks with base rate system, in case
there are no compulsions. At present level of
spread (0.0 to 0.25) discrimination not possible.
 The spread should be minimum, and preferably
“ZERO” if possible.
 Incase you have to borrow from HFC due to any
compulsion (project pre approved by HFC only),
keep track of your interest rate and transfer to
bank after a year or so.

42. reachsubrata.dey@gmail.com