Trickster Banks ! - True Incidence
In mid 2022s, the central banks around the world started raising rates in order to combat inflation, including the RBI. What I witnessed myself is that when the rates were revised, banks like SBI raised the rates (i.e., EMIs) even on their ongoing fixed-rate loans. Weird! Upon enquiring the bank, their response was the upward revision in MCLRs, leading to higher rates. Even, going into the contract note, the rates were mentioned in terms of MCLR. This, at first glance, gives an impression of validating the bank's response. However, further scrutiny of the note revealed that it was just a way the contract had been written that a false impression was projected. In reality, the rates on fixed-rate loans should have been fixed. Unlawfully, the banks had started charging higher EMIs and, the innocent citizens with low financial literacy fell into their trap. It's not the fault of customers that they are financially less literate but it's the banks who are to blame for exploiting them.
Do I suffer from sample size bias, as it includes just me? Actually, when searching online for similar incidences, I found numerous such customer grievances spanning across banks. The customers had reported the very same underlying issue. Let's now discuss the background and the incident that I, myself had experienced.
A family relative of mine had a personal loan from India's largest PSU for some X-year tenure, starting in 2020. Every month the EMI of a certain amount used to be deducted from his/her account. In April of 2020, the individual checked the deduction of EMI and found it to be greater by 4.5% than the usual EMI amount. The individual contacted me and I advised him/her to get in touch with the bank. I believed it to be an error from the bank's end. Upon contacting the authorities, the individual was told that the EMI had increased due to revision in MCLRs. The individual even asked the bank for a further reason, since the individual was aware of his/her contract note that mentioned: "the rate of X% would be valid for the entire tenor of the loan". The bank just re-iterated its answer. The individual, with greater financial stress now and small hope (a common man cannot imagine suing such a corporate), then contacted me back and stated the incidents that had occurred in the bank. I then asked the individual to share the contract note with me.
Upon going through the contract note, I found that the summary page cleverly mentioned the rate of interest to be "MCLR + premium rate". This, even to me at first, gave an impression of MCLR linked loan and the fact that revision would lead to the revision of the rate and the EMI. However, going deeper into the contract note, then I found the mentioned and I quote, "Interest on the loan will be charged at X% p.a. on daily reducing balance at monthly resets which is X% above the two-years Marginal Cost of Fund based Lending Rate which is at present X% p.a. The rate of interest viz X% will be valid for the entire tenor of the loan".
Now, this is a very important statement and according to me the basis of the loan agreement. However, the language indeed was cleverly used and it had even perplexed me at first. The reason was, firstly, the use of the word "monthly resets". If the loan indeed was of monthly reset, then it is possible for rates to get revised based on MCLR changes. However, in such a case, the last statement that clearly mentioned "fixed rates for the loan over the entire tenor" would not make sense. Reading between the lines then brought some sense back. The reset mentioned here actually implied the reset for the remaining balance amount on which interest is calculated every month. So, for example, when you get a loan, the EMIs paid by you contribute towards paying principal as well as towards interest. The interest here is determined on the basis of the outstanding principal. So, every month when EMI is paid, the outstanding principal gets reduced. The interest for the next month (calculated on outstanding principal) subsequently should be lower. But note that this would only be the case when for interest calculations, the outstanding principal is calculated every month. This calculation or re-set of principal every month is what's implied by the "monthly reset" in the contract. Had it been an annual reset, then every month would have to pay interest on the principal at the beginning of the year, despite the fact that the individual is paying principal and reducing it every month. Therefore, a monthly reset of principal actually is a good thing. Note, that this differs from a monthly reset of interest rate - which could be the case for floating rate loans. But here, the contract has no mention of resets for interest rate. And why should it, as the loan offered to the customer was a fixed rate loan?
The next point to note in the contract is the mention of the MCLR-linked rates. Since a few years ago, RBI has mandated banks to link all their products with MCLR. It is for this reason, that the proposed loan rates were mentioned in terms of MCLR. But this does not imply that change in underlying present MCLR should be reflected in the existing rate. The MCLR mentioned is to be used to determine the "fixed" rate at the initiation of the loan. So, the rate would be MCLR (2 years as mentioned in the contract) at the date of loan sanction. The premium would be added to that and the calculated number would become the interest rate. But now, in fixed-rate loans, that number would remain over the tenor irrespective of the movements of MCLR later. It is for this reason, that the word "which at present is X%" is mentioned in the contract. So, the then-present MCLR was mentioned in the contract, and so was the premium and using that the rate was calculated which should be fixed over the tenor.
Now, it was clear to me that the bank was in breach of the agreement by charging a higher loan amount. I drafted a grievance letter and advised the individual to submit the letter to the concerned authority of the bank. The bank's manager did accept the letter, transferred it to the head office and in a fortnight or so, the mistake was corrected. Then rates were brought back, as the individual found upon checking the loan account online. The next month's deduction of EMI was then in line with the usual numbers. Although I had asked the bank to refund the excess amount they had deducted they had not done it so far. But for me, the bigger concern is the excessive negligence of the bank in this aspect, having deducted more amount and even almost justified it. They simply earned 4-5% excess on their loan books through this trick. And my concern intensified when I found such activities were reported by customers of other banks as well.
Please be vigilant and keep yourselves financially literate as there are cruel Shylocks out there!
References:
SBI Home Loans: EMI Calculators
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