The Reserve Bank of India (RBI) on August 18, directed banks to allow individual home loan borrowers paying EMIs (equated monthly installments) under the flexi interest dispensation to opt for from a bouquet of options namely (1) fixed interest rate system or (2) increasing the loan amount or (3) extension of loan tenure —a move aimed at preventing loanees from falling into the trap of negative amortisation, in wake of rising interest rate as has been happening of late much to the chagrin of such borrowers. It has mandated banks and home loan companies to implement this diktat by December 31, 2023.
Negative amortisation refers to the piquant situation when your EMI is insufficient to even pay off the interest due. Banks, like the usurers, are more keen on interest so that the principal remains undiminished. When negative amortisation stares at borrowers they have no choice but to acquiesce in the act i.e., willy-nilly settle for elongation of the loan tenure or settle for heightened EMI. Truly, a devil’s alternative.
Now the RBI wants banks to rub it in further — banks should allow the third option as well i.e., migrate to the fixed interest rate regime. And how? By signing their own death warrant, as it were. Because banks and home loan companies now offer home loans at fixed interest rate ranging from 14 percent to 17 percent depending upon the credit rating of the borrower, tenure and other relevant factors. In 1988 yours sincerely took a princely home loan of Rs 90K at a fixed rate of 14 percent on a tenure of 15 years. The clock seems to have come full circle. In those days flexi interest regime had not made its mark.
The millennials perhaps haven’t heard of the fixed interest regime. Even if they have, they would rather cling onto the flexi regime in the fond hope that interest rates would head south sooner or later so that they could savour the upside of the dwindling interest rates. At any rate, 14 percent to 17 percent fixed rate is shocking and avaricious vis-à-vis the floating rate of 8.5 percent which was only a couple of years ago hovering around 6 percent till the Corona pandemic and Ukraine-Russia war combined to wreak havoc. It is strange that the RBI has been a mute spectator to this collective show of unreasonableness and cupidity by banks and home loan companies.
Truth be told, the RBI has been responsible for obsessively and robotically hiking the interest rates by a full 250 basis points over the last two years taking a leaf from its US counterpart the Federal Reserve without achieving its objective of cooling down the inflation which the latter seems to be achieving in the US. For, the two economies are different.
The Keynesian theory that too much money chasing too few goods and services is responsible for inflation resonates in the US context but not in the Indian. India is characterised by supply side constraints especially seasonal which is largely responsible for the raging food inflation. RBI is guilty of prescribing the US medicine for the uniquely Indian disease and thus has been guilty of missing the wood for the trees. It has heated up the interest market without any concomitant benefit to be seen on the ground. Now it is mocking the home loan borrowers by presenting them with a Hobson’s choice.
At best, at every reset, the borrowers would become conscious of what is in store for them when they get to know from January 1, 2024 what is in store for them. The option to migrate to the fixed interest rate regime would be pressed only by the most pessimistic. Millennials are hardly pessimistic. So, they would soldier on with the flexi rate regime in the fond hope that there is after all light at the end of the tunnel. If they are sufficiently young, they may agree for tinkering with the loan tenure and if they have deep enough pockets on the back of double income, they may grin and bear the heightened EMI. But they wouldn’t touch the fixed rate option even with a barge pole. So, the RBI hasn’t done anything new really.
—The author, S Murlidharan, is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed are personal.
(Edited by : C H Unnikrishnan)
First Published: Aug 29, 2023 9:43 AM IST