Home Loan – On Wives and Girlfriends

Recently, a good friend of mine was complaining about the behaviour of her bank ever since she took a home loan from them. Though the home loan was fixed, the bank promptly increased her interest rate (even though she had signed a ‘fixed’ rate contract) when the rates went up. And to top it all, when she called up to enquire about the change, she was curtly told to read the loan agreement where the bank had clearly reserved a right to increase the ‘fixed’ interest rate.

Grumbling about the bank’s behaviour, she happened to mention the sharp contrast in their behaviour from the time when she had applied for the housing loan. As both she and her spouse work at the middle management level for a leading MNC and individually draw a six-figure pay packet per month, the bank actually went overboard when she applied for the home loan. She confessed that the sales person from the same bank, not so long ago, was wooing them and willing to answer every query of hers to make her a client. All in all, a very satisfying experience, as she did not have to move out of her office even for a minute during the entire loan process.

She very aptly compared the bank’s behaviour to the behavioural changes of her spouse when she was a girlfriend and later now, when she is his wife. Laughingly, she described how the courtship period was dazzling with taxi rides and dinners at top restaurants, while post-marriage, it became auto rickshaw rides (before they bought their car) and the neighbourhood Udipi joint. Of course, she did not sound as unhappy with her spouse as she is with the bank.

However, her deft comparison of the ‘girl friend versus wife’ set me thinking. Study after study has come to the conclusion that it is far more profitable to retain an existing consumer than to get a new one. Yet, in the retail lending industry in India, there are numerous instances of banks clearly giving step-motherly treatment to their existing consumers, while running behind new consumers with even more attractive offers and discounts.

Take the case of interest rates on a “floating” basis which are supposed to come down when interest rates are falling and increase when the interest rates are increasing. While as a ‘girl friend’ (read new consumer) you can negotiate a sweet deal, problems start occurring after ‘marriage’. The ‘spouse’ (read the bank) forgets to reduce rates when they drop, but is prompt in increasing rates.

Why does this happen? — The only answer I can think of is the nature of the banking organisation. When a lot of promotions and bonus packages begin to hinge on the addition of new clients, the onus is automatically shifted to gaining numbers rather than retaining the numbers. Also, hardly anybody within the bank is adversely impacted when an existing consumer is dissatisfied or leaves the bank and refuses to come back to the bank for other needs in the future. However, the bank is bound to pay a huge price for such consumer dissatisfaction.

The only possible reason for the continued state of these affairs is the changing Indian system where ‘divorces’ are taken lightly. The new Indian consumer — like the new-age Indian woman — refuses to take things lying down and increasingly prefers to take a stand on various issues which have an impact on him or her. The trend is now so noticeable that very soon, the banks will have no option but to sit up and take notice of this phenomenon. Retaining, as they say, is much cheaper than gaining new customers.

How girlfriends get what wives don’t

It is during the interest rate reduction that this trend is most visible. An existing borrower (or wife) has been given a rate of interest of (say) 2% below the Retail Lending Rate. {The Retail Lending Rate is just a nomenclature and different banks have different names for this reference rate).

If the existing Retail Lending Rate is 11.50%, then the actually applicable interest rate for the consumer is 9.50% (i.e., Retail Lending Rate of 11.50 per cent less 2%).

Now, if the rates in the market have dropped, the new consumer (girlfriend) is not going to agree to pay this rate. In such a case, the bank will give him a lower rate of 8.50% by offering to calculate his interest rate at Retail Lending Rate less 3%.

So effectively, for the new consumer, the rate is 8.50 per cent whereas the old consumer continues to pay 9.50 per cent. Wives can also get their own bargain if they threaten to switch banks.

In fact, they may start getting the same deal as the girlfriend. Of course, wives who are docile and accept their lot will continue to pay more.