The home loan war between HDFC and SBI
A home-loan war has broken out between HDFC and SBI. The former, perhaps fears that the latter is poaching its home loan borrowers by aggressively marketing home loans. Are we going to see the proverbial tortoise overtaking the hare? We might!
ACCORDING TO the ’Economic Times’, dated February 24, 2009, the Housing Development Finance Corporation Ltd (HDFC), one of India’s leading home loan providers, has made it expensive for its existing borrowers to foreclose (or close prematurely) their loan account by raising a cheaper loan from another bank (read, State Bank of India). In banking jargon, this is called refinancing the loan. To pre-empt such refinancing on the part of its borrowers, HDFC has started applying a penalty (called prepayment charges, in banking jargon) of anywhere up to 3 per cent of the outstanding loan.
In India at least, one seldom comes across an instance of a public sector bank, more so a behemoth like SBI, giving a hi-tech financial institution like HDFC, a run for their money. SBI’s aggressive sale of home loans at 8 per cent seems to have stirred up a hornet’s nest (vide, ‘SBI’s move to stimulate the home loan market’ dated February 3, 2009). In the said article, the pros and cons associated with the SBI offer have been explained.
According to the said newspaper, the HDFC chairman Deepak Parekh had described the SBI scheme as a ’gimmick’ in a media interview. HDFC officers, however, played down the development. They explained that HDFC’s prepayment charges had always ranged between 0 and 3 per cent, depending on the various aspects of the loan account sought to be foreclosed. Further, the prepayment charges were also influenced by the conditions imposed on HDFC by its banker when it raised the loan from the banker for onward lending to individual borrowers. HDFC officers admitted that all attempts were made to ensure that the borrowers did not migrate to other banks. Additionally, whenever HDFC came out with a scheme at a lower rate for new customers, all floating rate borrowers who were paying a higher rate were allowed to switch to the cheaper rate loan on payment of a 0.5 per cent charge.
While HDFC is justified in attempting to stop migration of its borrowers to SBI, it should ensure that its borrowers are not caught in the crossfire. The SBI offer is not as rosy as it seems and this fact has been brought out convincingly in the Merinews article, dated February 3, 2009, cited above. HDFC can highlight the demerits of the SBI offer to prevent its borrowers from migrating to SBI instead of hitting them below the belt. Not long ago, an ‘ad war’ involving the 2-stroke motorcycle from the TVS stable and the 4-stroke motorcycle from the Bajaj stable helped the prospective buyer in making the right ‘buy’ decision in the context of his needs. Such healthy retorts through ‘ad wars’ can help HDFC to ingratiate itself with its borrowers and convince them that the interest rate charged by it and the SBI more or less even out.
According to the said newspaper, the HDFC loan document does not make any mention of pre-payment charges. All the same, it has been levying a prepayment charge of around 2 per cent on loans that are prepaid by obtaining refinance from other banks. This is unfair because it means that HDFC is not transparent with regard to levy of pre-payment charges.
For the information of the HDFC Chairman, such lack of transparency characterised the deposit scheme (called ‘home savings plan’) and the ‘home loan scheme’ that his company marketed in the late 1980’s. His uncle was the boss of HDFC then. HDFC overstated the interest rate it allowed on the deposits it accepted and understated the interest rate it levied on the home loans. It collected EMIs from the borrowers at monthly intervals but credited them to the individual loan accounts at annual intervals. I highlighted this fact through an article in the ’Economic Times’ (vide, “HDFC’s home savings plan,” dated March 26, 1990).
It is unfair on the part of HDFC to levy prepayment charges in respect of refinanced loans without being transparent about it. (Incidentally, ICICI Bank levies prepayment charges at 2 per cent of the outstanding balance whether the borrower settles it through refinancing or by paying out of his pocket). A healthy competition between the two lenders is welcome in the interest of all. Neither party should resort to predatory marketing. SBI on its part should be transparent, particularly in respect of information, which will have a bearing on the financial obligation of the borrower. For example, it should use the same font size (to borrow IRDA’s phrase) and not the small print (where the devil usually resides), to state that the interest rate of 8 per cent will apply only to the first year.
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