Mint Chennai

Charged ‘extra’ interest on a loan by your bank? Here’s what to do

In a 29 April directive, RBI noted three unfair practices with respect to interest on loans that banks need to stop

- Shipra Singh shipra.singh@livemint.com

Chennai-based Eswar Kumar was ecstatic when he finalized his first house purchase. Getting a home loan was also easy—he had a long-standing relationsh­ip with Canara Bank where he had his salary account. Kumar, a chartered accountant by profession, was promised by his bank relationsh­ip manager (RM) that his home loan of ₹70 lakh and home improvemen­t loan of ₹8 lakh would be approved without any hassle. But there was one condition—kumar should help the RM achieve his monthly target by agreeing to get the loan sanctioned a month in advance. “I will get the demand draft (DD) made in September, but the loan will be disbursed in October when you need the money,” Kumar’s RM said. Kumar purchased the house in October 2023.

Kumar agreed to the advance sanction, but little did he know that he would have to shell out nearly ₹48,000 extra in interest. “I was charged interest on both the home loan and the home improvemen­t loan from the date of sanction. I was finally given the DD of the home loan 18 days later and the home improvemen­t loan was disbursed three months later in December when I requested for it,” said the 29-year-old. The bank might have charged pre-emis on the home improvemen­t loan, but Kumar says he is not aware of this as the bank hasn’t explained the reason for charging interest on the home improvemen­t loan when he did not request for disburseme­nt until December. An email sent by Mint to Canara Bank did not elicit any response at the time of filing this story.

Each time Kumar raised the issue with his bank RM, he was promised that the interest would be reversed. A few months later, the RM was transferre­d, leaving Kumar in the lurch. “The biggest mistake I committed was to not take this up with the bank via emails. All the communicat­ion was verbal with the RM. I will now lodge a complaint with the RBI (Reserve Bank of India),” said Kumar.

Kumar’s grievance may indeed get addressed by the central bank, which has recently warned banks, nonbanking finance companies (NBFCS) and other registered entities against resorting to “unfair practices” to extract extra interest on loans from borrowers. In a directive dated 29 April, the RBI mentioned three unfair practices with respect to interest on loans that banks need to stop— charging interest from the date of sanction in place of disbursal; in the case of disbursal or repayment of loans in a month, charging interest for the entire month rather than charging it only for the period for which the loan was outstandin­g; and collecting one or more instalment­s in

ESWAR KUMAR,

October 2023

loan 18 days later improvemen­t loan in December 2023

Flagged it to relationsh­ip manager (RM) verbally; was promised interest would be reversed.

RM is transferre­d to other branch; Kumar doesn’t have communicat­ion trail to show to the bank. Kumar plans to report the case to RBI.

charged from date of sanction and not disburseme­nt. advance but reckoning the full loan amount for charging interest. An advance EMI refers to paying one or more EMIS before the loan is disbursed so that the principal amount minus the processing fee and the advance EMIS amount is disbursed. An advance EMI only consists of principal and not interest. This helps reduce the principal on which the total interest is calculated.

Raj Khosla, founder and managing director of Mymoneyman­tra, said the RBI’S interventi­on will ensure fairer treatment and protect borrowers from paying for money they haven’t yet accessed. “Consider a ₹70 lakh home loan with a 9% interest rate. A one-month delay in disbursal could result in you being

NAVEEN AGRAWAL,

bank charged interest from the date of cheque and not when cheque was encashed by transferor bank

two working days

interest

Raised with banks; both said charges are as per their standard procedure.

Lodged complaint with RBI; yet to be resolved.

charged from date of cheque and not when borrower receives it.

the time of loan transfer, both banks charge interest for the period when the loan is processed.

charged over ₹19,000 in extra interest,” he said.

Mumbai-based Janvi, a credit analyst, knows this too well. When she checked her EMI statement after paying the first instalment, Janvi realized she had paid nearly ₹8,000 more in interest. This was because there was a gap of 12 days between the date of cheque and when the builder received it. Janvi raised a complaint with the bank immediatel­y. “I got the refund, but it was a three-month ordeal. The bank kept making excuses that the delay was due to holidays and weekends. I am aware of these practices because I work in an NBFC,” she said.

It should be noted that the RBI’S warning is not limited to these three malpractic­es. “These (the three mentioned practices) and other such nonstandar­d practices of charging interest are not in consonance with the

case of prepayment, interest on reduced principle reflects from subsequent month and not from the date of prepayment.

takes advance EMI, which only comprises of principle, but doesn't reduce it from oustanding amount to calculate interest.

spirit of fairness and transparen­cy while dealing with customers. These are matters of serious concern to the Reserve Bank,” the RBI notificati­on said.

Another instance where borrowers could end up paying extra interest is at the time of transferri­ng their loan to a different lender.

In Gurgaon, Naveen Agrawal was charged interest twice on the same loan at the time of transferri­ng his loan from State Bank of India (SBI) to Axis Bank. “SBI charged me interest till the time funds from Axis were not deposited in their account, which logically makes sense. However, Axis charged me interest from the date it prepared the cheque and not from the date it was encashed by SBI. So, ultimately I paid two working days’ interest to both the banks without any fault of mine,” said the finance profession­al.

“The impact was around ₹3,000 only, but it’s surprising to see different practices adopted by different banks,” Agrawal added. This happened in December, and despite reporting the matter to the RBI ombudsman, Agrawal is yet to get a refund on the excess interest he has paid.

All the borrowers who spoke to Mint are finance profession­als and savvy enough to identify when they were charged extra. However, most borrowers may not be able to figure out how their interest is calculated just by looking at the statement. This also applies to conditions when customers make prepayment­s on their loans.

After a prepayment is made, it is a common practice among banks to recalculat­e EMI on the outstandin­g principal from the next month. This should happen only when the lender accrues interest monthly, which is not the common practice among banks. Some NBFCS follow this method, but Mint’s research shows they are few in number.

Khosla said loan interest accrues daily, not in monthly chunks, so whenever the borrower makes a prepayment, the interest should be recalculat­ed based on the reduced outstandin­g principal balance from the day the prepayment is credited to their account. “When interest is calculated on a daily basis, prepayment­s immediatel­y reduce the principal amount from the day they are received, regardless of the EMI deduction date,” he said.

A home loan borrower with HDFC Bank told Mint he has made five prepayment­s on his loan in the last seven years, but each time the interest was recalculat­ed on the reduced principal amount from subsequent months. “I wasn’t aware it should be done effective the date of the prepayment,” he said, on the condition of anonymity.

While the directive is aimed at loans, the same rule applies to credit card users also when they pay the minimum amount due or make partial payment of the total outstandin­g amount. The interest is levied on the remaining amount after adjusting for payments, refunds or reversed transactio­ns, and not the entire bill amount. Also, late payment fee and other charges are also levied on the remaining amount.

When borrowers find such discrepanc­ies in their interest calculatio­n, they must report it to the bank or credit card company through email. “In case you find you are being charged wrongly, your first step is to raise the matter with the grievance cell of the lender. The lender is mandated to resolve your dispute within 30 days of receiving your complaint. In case your complaint is not resolved, you can raise the matter with the Integrated Ombudsman of the RBI,” said Adhil Shetty, chief executive officer of Bankbazaar.com.

Emails sent to other major banks including HDFC Bank and Kotak Mahindra Bank seeking comment on the RBI’S directive did not receive any response.

Understand­ing economic cycles

The stock market is intricatel­y intertwine­d with the economy. At any point in time, the economy will be going through one of these phases: expansion, peak, contractio­n and trough; and a certain set of sectors will always be on the winning side. For example, when the economy is expanding, the financial services and consumer discretion­ary sectors tend to thrive. When contractio­n begins, it is consumer staples, healthcare and utilities that can weather this phase well. If a lay investor were to indulge in sector rotation, he will have to move money away from certain companies or sectors and move on to another set of companies or sectors in anticipati­on of the performanc­e of the sector(s) in the next stage of the cycle.

Three years back, the economy had spare capacity and was experienci­ng weak demand. The post-pandemic recovery was fundamenta­lly driven by the turning of the real estate cycle, with monetary and fiscal policy becoming more supportive of growth. This put cyclical sectors (capital goods, automobile­s, cement, insurance and asset management companies) in a good position, and they are still gathering momentum. As the cycle moves forward, it is very likely we may enter a phase when demand exceeds capacity, implying the economic cycle peaking.

Investor dilemma: Identifyin­g the right set of sectors To play sector rotation right, it is imperative for an investor to stay ahead of the curve, for which decisive action is required. Keeping an eye on sectors and the various triggers is time consuming and complex.

There are multiple factors to be considered when comprehend­ing where a sector is with respect to the stage in a cycle: earnings expectatio­ns, institutio­nal ownership, sentiment in the IPO market, margins, valuations. For example, over the past three years, PSUS have moved from being one of the cheapest segments in the market to being overvalued.

While economic cycles all follow a similar trajectory, the triggers at any stage could be as varied as monetary policy or a pandemic or a war. Depending on the trigger, some sectors will thrive while others may wither under pressure. One needs to know which ones will be impacted. Another source of uncertaint­y is the depth and length of a particular stage in the cycle. A miscalcula­tion on this front can do sizeable damage to a portfolio.

Then comes behavioura­l biases. When a sector is overvalued, there is the affinity to extrapolat­e the last two years’ growth into the next five years, resulting in suboptimal growth of your portfolio. In 2007, when infrastruc­ture stocks were phenomenal­ly expensive, many investors went overboard and had a suboptimal investment experience over the next decade. Similar was the case with IT in 1999 and pharma in 2015.

Post the macro and sector view comes the stock-picking skills to narrow down on the right company. And then take a call on buying-selling-positionin­g. Moreover, the tax implicatio­ns and transactio­n costs for a retail investor with every buy and sell transactio­n can take out a significan­t portion of gains.

Embrace this strategy with a mutual fund

The optimal approach to play sector rotation is via investing in a relevant mutual fund. For such a strategy, a fund of funds (FOF) structure works well. In such a structure, the fund manager, based on his view on the economy, will enter or exit multiple funds as and when the cycle throws up opportunit­ies.

Over the past few years, investors have been increasing­ly opting for passive offerings. So, if you are an investor looking for passive underlying, then one can consider an FOF offering. Here, the portfolio consists of sectoral or thematic exchange-traded funds to gain exposure to relevant pockets of the market.

Being a FOF, this does not require the investor to open a demat account. If an individual has to invest in each of the ETFS individual­ly, a demat account would be required.

In effect, opting for an offering wherein the fund manager will do the needful on behalf of the investor is the easiest approach to playing sector rotation in a hassle-free manner.

Chintan Haria is principal, investment strategy, ICICI Prudential AMC.

When borrowers find discrepanc­ies in their interest calculatio­n, they must report it to the bank or credit card firm via email

To play sector rotation right, it is imperative for an investor to stay ahead of the curve

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