Provide all info relating to loans

Whether it is a home loan or a vehicle loan, personal loan or a business loan, when you apply for a loan, what are the questions that are uppermost in your mind? Or to put it differently, what kind of information would you require to take an informed decision on the loan? Well, it does not require much effort to guess. First and foremost, you would want to know the rate of interest at which the loan would be available. Next, the tenure of repayment and the monthly instalment that you are required to pay. You would also want to know how the instalment is worked out, and if at anytime, you want to foreclose the loan, whether there would be any penalty, and if so, what it would be.

You will also want to know the penalty for late payment and the various options available to you in terms of the interest rate. Suppose you want to move from a floating to a fixed rate of interest, do you need to pay any charges? Are there any restrictions on such change from one interest rate regime to another? How much is the processing fee that you need to pay, and would it be returned if the loan is not given or taken?

Well, if the bank strictly follows the RBI guidelines on lending (Fair Practices Code for Lenders), then it would give you upfront, without even your asking, clear answers to all these questions. That would also ensure that you can compare the lending rates of different banks and financial institutions and choose the one best suited to your needs. It would also ensure that the bank does not spring an unpleasant surprise on you at a later date in terms of processing charges or interest rate or the terms and conditions governing the loan.

But, unfortunately, not every bank believes in adhering to the instructions of the regulator, nor in ensuring transparency and fairness in lending operations. The proof of this can be seen in the consumer complaints on the issue and also in the repeated reminders sent by the regulator to the banks.

Some banks, for example, claim that they charge a processing fee which is much less than the rival and later, at the time of loan disbursal, deduct from the loan, hefty amounts towards “legal opinion,” and if a property is being mortgaged, towards “valuer’s fee.” Similarly, there have been complaints about banks charging a much higher interest than what is disclosed in the application document.

In its communication issued to all scheduled commercial banks and financial institutions on November 25, 2008, the Reserve Bank of India had condemned such practices. “It has come to our notice that some banks levy, in addition to processing fee, certain charges which are not initially disclosed to the borrower. It may be mentioned that levying such charges subsequently without disclosing the same to the borrower is an unfair trade practice”, the RBI had said and asked all banks to ensure that the loan application form contained all information relating to charges/fees for processing. Banks must inform “all-in-cost” to the customers”, the RBI had said.

But obviously, the banks did not heed this advice because on November 12 this year, the regulator was forced to issue another stern warning on the subject. Referring to its earlier circular on the subject, the RBI said: “With a view to bringing in fairness and transparency, banks are advised that they must transparently disclose to the borrower, all information about fees/charges payable for processing the loan application, the amount of fees refundable if loan amount is not sanctioned or disbursed, pre-payment options and charges, if any, penalty for delayed repayments if any, conversion charges for switching loan from fixed to floating rates or vice versa, existence of any interest reset clause and any other matter which affects the interest of the borrower. Such information should also be displayed on the website of the banks for all categories of loan products”, the RBI said.

So whenever you take a loan, remember the RBI circular and insist on the bank making full disclosures about the loan. You can also look up on the bank’s website for this information, compare interest rates, terms and conditions and choose the best available option.

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