Notice how home loan providers have been turning so customer-friendly? Competition deserves credit for that. The customer, as they say, is king. Notice, also, how 'low interest' deals are being used to lure home buyers? The current financial environment deserves credit for that. The home loan-taker, given the investment drought, must be encouraged. The times are just right for a credit-driven housing boom. And indeed, people are looking to get themselves their dream houses while the conditions favour entering a long-term relationship with a lender.

What you may not have noticed, however, is how existing home owners, having been enrobed in the purple gowns of royalty, are faring in their relationships. Are they happy?

Mid-loan Crisis

The feel of royalty is nice while it lasts...and that's uptil a point. Sign on the dotted line, and thud you go, falling from grace. At least that's what some home loan-takers have experienced. Particularly pained are those who went for the more familiar names inhabiting the Indian financial landscape-state-owned banks.

Now, before you let out that long sigh, do acknowledge that nationalised banks are not a dumb choice to start with. Operated by the government, such banks are not only seen as failure-proof, they're thought to be explicitly accountable to the people of India. Also, they have the widest access to people's savings. It's no secret that the past few years have seen their depositor base swell, and that the retail loans they give tend to suffer lower delinquency rates than corporate loans.

Among the lenders causing the most heartburn is the venerable State Bank of India (SBI), which stands accused of violating the spirit-if not the letter-of its relationship agreement with those who've taken floating-rate loans to buy their dream home.

As the term implies, a 'floating interest' loan is one on which interest is to be calculated and paid on the basis of the prevailing rate, which moves up and down, at the time of the particular payment (typically, an instalment). A fixed-rate loan, in contrast, is to be repaid down the years on the basis of a fixed pre-decided rate, regardless of market movements.

Naturally, a low-interest rate regime ought to favour such floating-rate borrowers. Alas, the definition of the 'prevailing rate' has a loophole. The bank is supposed to use an external floating benchmark rate, in accordance with which its charged rate is to move up or down. This is usually the lender's base retail prime lending rate (PLR). So far, so good. But what if the bank keeps its prime rate constantly high, on paper, while lending to corporates at 'sub-PLR' rates to stay competive?

That destroys the very concept of a PLR, except to wave at poor floating-rate borrowers who're locked in to the terms of the deal, with no recourse to the actually prevailing rate...lower, as it would be.

What if the customer wants to quit the relationship? There's more fineprint. If an old customer wants to refinance a loan, he must pay a pre-payment penalty, which is otherwise not applicable on a floating-rate home loan. "It's heads I win, tails you lose," remarks an industry source. The Reserve Bank of India allowed it.

What does SBI have to offer by way of defence? The terms of the contract, presumably (persistent attempts to get an official comment from SBI went in vain), and the fact that sub-PLR lending is entirely permissible now.

Yet, in a competitive market, what matters is not the actual fineprint in a court of law, but good old-fashioned trust in the banker, and customer perception of the same. No matter how much SBI gains in financial terms, it surely stands to lose a lot in terms of the marketability of its loan products-if word of this goes around. The mightiest of institutions need to keep customers engaged, and satisfied.

New Baits For Old

At the end, though, it always comes down to the principle of caveat emptor: buyer beware. As for regulation, competitive forces could probably do an adequate job. Those stung by SBI, for instance, should look around to see what other banks have to offer.

A quick scan of the retail home loan market indicates that ICICI, HDFC, and most other institutional lenders have indeed been prompt to adjust their floating home-loan rates in line with falling rates.

Says Suresh Menon, General Manager (Mumbai Region), HDFC: ''We don't have a differential interest rate for existing and new customers for floating rate loans. If a customer is willing to take the risk to float with a rate, any reward or damage is passed on to him/her.''

While HDFC adjusts the rate every six months, ICICI reviews it every quarter. Says Rajiv Sabarwal, COO, ICICI Home Loans: ''At ICICI, all customers are treated at par. The effective rate is passed on to the customer at the beginning of the prospective quarter. This is done purely for operational convenience. After all, we have to inform lakhs of customers across 250 cities, that the rate is going up or down and their instalments are getting adjusted accordingly. This takes time.''

As a product, floating loans are still something of a novelty, adds Menon. ''When we introduced this product three years back,'' he elaborates, ''people weren't used to this kind of product. We kept the review period as half-yearly because if interest rates go up, impact on the customer could be severe. Since salaries don't move in line with interest rates, monthly budgets of customers could go haywire in case there is a steep rise in interest rates. Fortunately for customers, we haven't seen this side of the interest rate move since the introduction of floating rate products.''

Is SBI capable of such sensitivity?