Large-scale lending in the property segment in a short span of time has brought about many irritants between the borrowing public and bankers in general. While the lending scheme formulated by banks for financing real estate may be in line with the various schemes for lending, subjects like the loan application itself may need a fresh look if the reforms kicked off in the U.S. is any indication.
This article brings to you some thoughts on the need for more transparency in borrower-lender relationships. While the Banking Regulation Act covers the control exercised by the Reserve Bank of India, the consumer protection issue and the related Act does not integrate itself with RBI's control over the banks.
Protection
The Truth in Lending Act (TILA), enacted in 1968, was intended to protect the borrowers in their dealings with creditors / lenders. The Act specifies that it is very important to make the consumers aware of all the terms and conditions of extending credit and the cost of such credit. The intention is to make the borrower aware of all aspects of credit so that he can compare the terms offered by various lenders and to help him to settle for the best terms.
The model forms and clauses are appended to the Act. These forms, called as Good Faith Estimate Forms (GFE), were revised in 2010. These forms are akin to the loan application forms designed by the banks here.
In the early stages of lending for real estate in India, the banks used to design their own forms. There used to be no uniformity with regard to these forms designed by different banks. Though a sample format was designed by the RBI, banks have been prescribing their own forms based on their experience and to suit their own needs.
The global recession which showed up since 2007 compelled the regulators to identify gaps in norms, forms, and agreements in vogue in the banks, especially in the U.S. Consequently, model forms under the ‘Good Faith Estimate Formats' have been circulated as per the directions of the Consumer Financial Protection Bureau, with the intention of ‘bringing out something better.' These forms are, by and large, disclosure instruments which will provide better transparency and avoid conflicting interpretations at a later date.
The Indian scene
In India, we often come across misunderstanding between the lender and the borrower at different times, especially after the loan is issued.
The areas of misunderstanding include margin, interest rate changes, foreclosure, and accelerated payments. Some banks make narrow interpretations to circumvent rules.
A typical example has been the charges for prepayment of loans, which the RBI waived recently. Another is the deregulation of interest rate on savings bank balances. It has been reported that a few banks have refused to deregulate the interest rate on savings bank accounts.
Similarly, closure by obtaining a fresh loan from another bank is being made ineligible for waiver of prepayment charges by some banks on the ground that the RBI's intention is to facilitate genuine prepayments from own resources.
Loan application forms and agreements
The common complaint is that there is lack of transparency in the borrower-lender dealings. While the borrower tries to withhold most of the information (other than what is really asked for in the loan forms), the lender too prefers to tell only what is being asked for — the bare minimum.
The inexperience of the borrower is exploited by the dealing staff at the counters. Again, the small print in the application form and the agreements go against the borrower when some critical points come up at a future date.
While the major terms and conditions, such as period of the loan, interest rate, and EMI are focused upon, the charges, penalties, and discretionary powers available to the lender are not pointedly made known to the borrower.
For many years, there was no organisation of borrowing public or even the bank customers. Many of us may recollect the initiative taken by M.R. Pai, who founded the All India Bank Depositors Association even before the Consumers' Protection Act came into being.
The scenario has changed substantially over the last 20-25 years and the customer has become the king today in many respects.
The urgent need
If the number of complaints is any indication as can be seen from the data received by the RBI/Government, there is a need for a mechanism where banks and financial institutions respond immediately to dissatisfied telephone calls or complaint SMS from customers. In this connection, an initiative by the State Bank of Mysore, the Bangalore-based associate of the State Bank of India, recently needs to be commended.
The bank established a system that can receive SMS from a dissatisfied customer through “SMS-Unhappy”.
Transparency in dealings and genuine interest in the client's welfare without jeopardising the business of the lending institution is perhaps the right solution to this problem.
