With RBI cutting the interest rates so frequently, a low interest regime is gradually emerging in the economy but the rates cuts by most banks have not benefited the existing customers of the banks against the new customers who are offered the best deals.
However the bankers explain that now as the interest rates are easing existing customers of the bank will also avail the benefits of rate cut. Although the reduction in the interest rates for this category of customers will be at a slower pace.
Vice-President and Business Head, Personal finance, Kotak Mahindra Bank, Kamlesh Rao said, "Now, when the interest rates are going down, new customers benefit by lower rates with immediate effect. That's called the placement rate. But this rate cut becomes applicable to existing customers only in the next quarter."
The statement given by the vice-president clarifies that if the bank lowers its interest rates in the month of January, it would be applicable for the old customers from the month of April. The bank however has not sent any official notice regarding the matter as it feels that there may another revision in rates by that time.
"We wait for some stability in rates before we send out official communication to existing customers. The portfolio rate becomes effective only after every quarter when the latest effective rates are factored in for existing customers. This time lag of one to three months and the discrepancies apply both in case of a rise/fall in interest rates," said Mr Rao.
Experts say that banks compute benchmark rates, to which home loan rates are linked, internally and the method of computation is neither specified by the RBI nor the National Housing bank (NHB). So some banks like Kotak Mahindra Bank has linked its home loan rates to the 1-year FD raters.
While some others do not agree to link the home loan rates to a yields coming from corporate bond or government bond. "There should be an independent body which creates a basket of rates collected from different banks. They can calculate an average of those rates and arrive at a benchmark rate as the local banking industry has vintage data," says Sujan Sinha, senior vice-president (retail assets), Axis Bank.
Most of the developed economies follow the concept of independent external benchmark rate to which the home loan rates are linked. For instance in Australia, the benchmark rate for home loans is referred to as the average annual percentage rate (AAPR). Similarly in UK, the mortgage rate is linked to the London Inter-Bank Offered Rate (LIBOR).