By Dr Suvrokamal Dutta
Amidst hardening interest rates and rising defaults, it has come into the notice of the India Street that Indian banks are inserting new clauses in their home loan agreements to protect balance sheets.
If experts are to be believed, while few have stopped giving fixed rate loans beyond a few years, a number of them have set an early reset clause while others are putting in a lock-in period within which fixed to floating and floating to fixed switch cannot take place. In my opinion, all these changes will make life difficult for borrowers, who are already coughing up higher EMIs.
“Borrowers who have taken home loans on floating rates of interest have seen them increase by three to four percentage points in the last 18 months to around 10-12 percent,” pointed out Saddia Abid, home loan expert. There is no doubt that with rising rates, new borrowers are looking at taking fixed-rate loans while existing borrowers are thinking of a switch from floating to fixed rate loans despite the higher rate. Though, point to be noted here is that banks are designing the loan documents to discourage this.
It is worth mentioning in this regard that a fixed rate loan is aimed at protecting the borrower against the risk of rising interest rates. But a reset clause will enable banks to charge a higher rate at the time of the reset in the event interest rates move up.
Theoretically speaking, state owned IDBI Bank and Union Bank of India do not offer fixed rate loans above five years. Some of the bank officials feel that the fixed and floating rate concept is slowly losing its relevance. “In the last two occasions, we have not raised interest rates for existing floating rate customers, which means their loans have been at a fixed rate of interest even as interest rates have moved up in the system,” pointed out MV Nair, Chairman of Union Bank of India.
Plenty of other banks are giving a long-term fixed rate option with a reset clause. Not so long ago, Bank of India minimized its reset option on fixed-rate home loans from ten years to five years.
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