Floating rate loans are one of the biggest financial traps in India, silently draining borrowers of their hard-earned money. While they are advertised as market-linked instruments that benefit from interest rate cuts, the reality is far from fair. The structure of floating rate loans in India is fundamentally flawed, operating in a way that benefits banks at the cost of borrowers.
When the Reserve Bank of India (RBI) raises interest rates, banks waste no time in increasing the rates on floating loans. However, when RBI cuts rates, borrowers often have to jump through hoops, submit formal requests, and even pay conversion fees just to avail the reduced rate. This asymmetry raises an important question: Why does RBI allow such malpractices?
The Catch with Floating Rate Loans
Floating rate loans, in theory, should adjust automatically with the prevailing interest rates. But in India, banks have designed the system to maximize their profits while keeping borrowers at a disadvantage. Here’s how:
- When RBI hikes rates – The floating rate on your loan increases almost immediately. Banks justify this by citing higher borrowing costs and the need to maintain profitability.
- When RBI cuts rates – The reduction in your loan rate is neither immediate nor automatic. Borrowers often have to approach the bank, fill out paperwork, and sometimes even pay conversion fees to benefit from the lower rates.
This is not how a true floating rate loan should work. The very essence of floating rates is that they should move both ways—up when interest rates rise and down when they fall—without manual intervention or additional costs.
The RBI introduced the External Benchmark Lending Rate (EBLR) in 2019, aiming for better transparency. EBLR ensures that loans are directly linked to an external benchmark, such as the RBI’s repo rate, ensuring faster transmission of rate changes. However, older loans, particularly those linked to the Marginal Cost of Funds-Based Lending Rate (MCLR), continue to suffer from delays in passing on rate cuts.
Even with EBLR, banks have found ways to introduce charges that restrict the smooth transmission of lower rates. Borrowers often end up paying processing fees and conversion charges when switching to a lower rate, making the entire system biased in favor of lenders.
Are You a Victim of Such Loans?
If you have a home loan, auto loan, or personal loan under a floating rate structure, chances are you’ve faced this issue. While banks act swiftly to increase your EMIs when rates go up, they make you struggle when rates come down. Here’s what you can do:
- Check Your Loan Type:
- Is your loan linked to MCLR or EBLR? Banks are now required to offer loans based on EBLR, but older loans may still be under MCLR.
- Request a Conversion to EBLR:
- If your loan is under MCLR, consider switching to EBLR to benefit from faster rate transmission. However, banks may charge a fee for this.
- Negotiate with Your Bank:
- Some banks waive conversion fees for premium customers or those who actively negotiate. Always ask for a waiver before agreeing to pay.
- File a Complaint:
- If you feel your bank is unfairly delaying rate reductions, you can file a complaint with the RBI Ombudsman.
Take Action – Email Your Bank
If you’re stuck with a high interest rate despite RBI cuts, use the following email template to seek clarity from your bank. Share this with your network to spread awareness.
Subject: Request for Information on Loan Benchmark Linkage and Conversion Process
Dear Team,
I am writing to seek clarity regarding the benchmark rate linked to my loan account [Your Loan Account Number]. Kindly address the following queries at the earliest:
- Please confirm whether my loan is currently linked to the Marginal Cost of Funds Based Lending Rate (MCLR) or the External Benchmark Lending Rate (EBLR).
- If my loan is linked to MCLR, kindly provide:
a. A step-by-step procedure to convert it to EBLR-linked terms.
b. A detailed breakdown of all associated costs (processing fees, administrative charges, etc.).
c. Required documentation and timelines for the conversion.
I request a written response at the earliest, clarifying the above points in detail. Please ensure the details are specific to my loan account and adhere to RBI guidelines.
Looking forward to your prompt response.
Conclusion
Banks have long enjoyed an unfair advantage by manipulating floating rate loans in their favor. While RBI has taken steps to improve transparency with EBLR, the reality remains skewed. Borrowers must proactively fight for their rights, question unfair charges, and demand a fair transmission of rate cuts.
If you’ve faced such issues, act today. Use the email template, ask your bank the right questions, and push for fairer lending practices. The more borrowers raise their voices, the harder it will be for banks to continue such unfair practices unchecked.
Look forward to your thoughts and experiences in this aspect.