Case No. Case: 1.Shri Govind Agarwal, 2.Shri Norbert Lobo, 3.Shri Gulshan Kumar Gupta Vs 1.ICICI Bank Ltd. [Alongwith Case Nos. 11/28, 12/28 and 13/28], 2.Citibank N A, 3.BHW Home Finance Ltd.. Competition Commision of India
| Case Number | Case No |
| Judges | Ashok Chawla (Chairman), R. Prasad, Geeta Gouri, Anurag Goel and M.L. Tayal, Members |
| Issue | Competition Act, 2002 - Section 66(6) |
| Judgement Date | June 07, 2011 |
| Court | Competition Commision of India |
Order:
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Consequent upon the repeal of Monopolies and Restrictive Trade Practices Act, the following 6 cases have been received by the Competition Commission of India (the Commission) from the erstwhile Monopolies and Restrictive Trade Practices Commission (the MRTPC) on transfer under section 66 (6) of the Competition Act, 2002 (the Act):
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Shri Gulshan Kumar Gupta Vs. BHW Home Finance Ltd (15/28)
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Shri Norbert Lobo Vs. Citibank N A (6/28)
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Shri Madan Lal Ghai Vs. ICICI Bank Ltd (13/28)
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Shri C. M. Gupta Vs. ICICI Bank Ltd (11/28)
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Shri Prakash Bajpai Vs. ICICI Bank Ltd (12/28)
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Shri Govind Agarwal Vs. ICICI Bank Ltd (2/28)
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Facts/allegations, in Brief
2.1 All the above cases relate to charging of differential rate of interest from different set of borrowers and pre-payment penalty being charged by banks/finance companies. As the subject matter of information is substantially the same in all these cases, the DG has decided to club the same for common investigation
2.2 The main issue for investigation was of differential rate of interest charged by the bank/financial institutions from new customers and the existing customers and levying of prepayment penalty or foreclosure charges on the customers/ borrowers for switching over to another bank/financial institution.
2.3 As per the information, Shri Gulshan Kumar Gupta availed Housing Loan from BHW Home Finance Ltd. (BHW) for amount of Rs. 8,97,000/- under floating rate of interest @ 11.75% per annum for a period of twenty years. He came to know that the company has reduced the rate of interest to 10.25% per annum. To clarify the fact, the informant contacted the company and they confirmed the same. It is stated that for new customers, the interest rate offered was as low as 9.99%, but for the existing borrowers the rate of interest had not been reduced by the bank. Furthermore, it is stated that the applicant has to pay 2% prepayment penalty on entire amount to switch to another bank which may be offering lower interest rate. He has alleged that the benefit of the declining interest rates in home loans is not given to him by BHW. Also the prepayment charges restrict him from shifting to some other bank.
2.4 As per information filed by Shri Nobert Lobo, he and Molly Lobo have taken housing loan at a floating rate of interest from Citibank. They availed the 5% cash back scheme of Citibank. The loan was given at a lower rate of interest of.75%, as compared to the rates given to existing customers who were paying 9.75% to 10.25%. However, soon thereafter, the bank started increasing interest rates and within a year it had increased the interest rates by 3% and brought it at par with existing rates for older customers.
2.5 According to the information, Shri Madan Lal Ghai had taken a home loan of Rs. 20,00,000/- from ICICI Home Finance Co. Noida on a floating rate of interest of 7.25%. The bank increased the rate of interest 7 times during the period 16.06.05 to 31.03.07. The EMI was increased from Rs. 17,545/- as on 07.05.2005 to Rs 21,749/- per month with effect from July 2007, at an enhanced interest rate of 11.75%. The informant stated that the bank gave home loan to its new customer at a floating interest rate of 10.5% in year 2007. He has alleged that ICICI Bank is charging higher interest than the other banks and also levying prepayment penalties.
2.6 Shri C. M. Gupta informed that he had availed a home loan of Rs. 15 lakhs on floating rate of interest of 9.5% per annum in September 2006 from ICICI Bank Ltd. The said loan was to be prepaid in 180 equal installments of Rs. 15,664/-. He states that in a news column it had been stated that ICICI bank had increased the home loan interest rates for the new customers but the interest rates for old borrowers had remained unchanged. Despite this, Shri Gupta received a communication from the bank that interest rate on loan had been increased from 9.5% to 12% per annum and repayment period had been increased from 180 EMIs to 292 EMIs. He tried to repay the balance amount of loan in one go for which ICICI Bank did not agree and asked for prepayment charges of 2.5%. He has alleged that ICICI Bank has increased the interest rates and is also levying prepayment penalties if he wished to foreclose the loan.
2.7 As per information filed, Shri Prakash Bajpai took housing loan of Rs. 13,25,000 from ICICI Bank at floating rate of interest of 7.75% on October, 9, 2004. Soon after that the bank increased the rates and started charging interest rates higher than most other banks citing rising costs of funds. It is also stated that in respect of the Foreclosure Charges the bank is charging a fee of 2% on full & final prepayment.
2.8 Shri Govind Agarwal in his information sated that he had taken a home loan of Rs. 7 Lakhs from ICICI Bank in March, 03 on floating rate of interest Later ICICI Bank intimated that with effect from 1st Oct. 08, floating rate of interest would stand increased to 14%. It is stated that new customers were being offered loan at a lower rate of interest at 12% in Oct 08. It is further submitted that bank does not adjust floating rates in a fair and transparent manner. It is also alleged that ICICI is cheating existing customers by asking for processing fee again to extend the lower floating rate of interest applicable for new customers to old customers.
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After receiving the complaint the MRTPC sought comments/replies from the said opposite parties. In the meantime the MRTP Act was repealed and the case was transferred to the Commission in terms of Section 66 (6) of the Act.
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The Commission in its ordinary meeting held on 08.03.2010 observed that all the above cases relate to charging of differential rate of interest from different set of borrowers and pre-payment penalty being charged by banks/finance companies. The common issue observed in all these 6 cases is that the above mentioned banks and financial companies are charging differential rates of interest from new customers qua existing customers. Further it was observed that in case existing borrowers wish to switch over to some other finance company, charging of pre-payment penalty acts as a barrier. Upon forming an opinion that there exists a prima facie case, the Commission referred the matter to the Director General (DG), CCI for investigation vide its order dated 08.03.2010. As the subject matter in all the above said cases was substantially the same, it had been decided by the Commission to club the cases for common investigation in terms of Section 26(1) of the Act read with regulation 27 of CCI General Regulations, 2009.
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The DG submitted the investigation report dated 21.05.2010 to the Commission.
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Summary of Findings of DG
The findings of the DG in his investigation report are summarized below:
6.1 The report observes that the floating interest rate which is variable over the loan period is dependent on two factors (i) benchmark/reference rate (ii) Spread, which is more or less constant for the loan period. The benchmark/reference rate remains same for the existing and new customers. It is the spread margin which differs from customer to customer. However, according to the report, it can be inferred that exact charge or the range of possible charges to be levied was not clearly specified in the loan agreement.
6.2 The report observes that banks and financial institutions started offering loans with adjustable rates to manage volatility and asset-liability mismatch. The spread is calculated based on profile of the customer, credit history, repaying capability, tenure of the loan, nature of property etc., The spread seeks to cover the cost of funds, profit mark up, credit risk etc.
6.3 The report observes that this spread/margin is variable and also negotiable and it depends on negotiations between the lender and the borrower. According to the report, since the spread varies from individual to individual, the interest rate offered to two individuals at a given point of time cannot be same although the benchmark remains constant and the floating rate offered to the customer remains unchanged.
6.4 All the customers have different loan requirements and characteristics and it is not feasible for the banks to have a uniform common spread for all the customers.
6.5 The DG report observes that banks/financial institutions are passing on the effects of increase/decrease in Benchmark/Reference Rate to customers but are not adjusting the spread, which once calculated/fixed remains constant for the loan period. The report further observed that the spread/margin can be negotiated or altered on payment of conversion or switch over charges by the borrowers at the time of switching from fixed to floating rate of interest.
6.6 According to the report, the impression that banks are not passing the benefit to customers when interest rates are falling is on account of non transparency about interest setting mechanism and lack of awareness on part of consumers about the prevailing PLR/FRR and the applicable spread. This shortcoming of the system has been duly addressed by RBI by converting from PLR system to Base rate system. Base rate is the minimum rate at which banks can lend after meeting all the expenses and is more objective and transparent than PLR.
6.7 The report remarks that RBI guidelines on base rate are intended to ensure transparency in the pricing of lending rates to the borrowers. According to the guidelines, the banks are now required to display the information on their base rate at all branches, websites and to general public from time to time through appropriate channels.
6.8 The DG's report states that in most of the cases the informants have taken the loan during the period from 2003 to 2007. It is noted that the average interest rate during the period has moved in the range from 10.63% to 13%. The average interest rate was range bound between 10.63% in April 2004 to 10.50% in March 2006 and downward movement of...
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