MRTP Case No. DGIR/2007/IP/104-RTPE Case No. 33/2007. Case: In Re: Charging of Differential Rate of Interest by banks Vs. Competition Commision of India

Case Number:MRTP Case No. DGIR/2007/IP/104-RTPE Case No. 33/2007
Party Name:In Re: Charging of Differential Rate of Interest by banks Vs
Judges:Ashok Chawla (Chairman), R. Prasad, Geeta Gouri, Anurag Goel and M.L. Tayal, Members
Issue:Competition Act, 2002 - Section 66
Judgement Date:June 07, 2011
Court:Competition Commision of India
 
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Order:

  1. The present case was taken up suo moto by the Monopolies & Restrictive Trade Practices Commission (MRTPC) on the basis of a news report/article appeared in the "Economic Times" dated 18.10.2007. A preliminary investigation was ordered in the matter by the MRTPC to the Director General (Investigation and Registration), vide order dated 14.11.2007 in RTPE No. 33/2007. The case has been received by transfer under section 66 of the Competition Act, 2002 from MRTPC, vide their note dated 28.10.2009, to the Competition Commission of India (CCI).

  2. The facts of the case, in brief, are as under:

    2.1 According to the above referred news article in the "Economic Times" dated 18.10.2007, a person opting for floating rate of interest would assume that when the interest rate falls, the banks/HFCs would pass on the benefit to him. But that is not always the case. As per the article, bankers increase home loan rate by almost 0.5% when the cost of funds inch up by almost 0.25%, to protect their margins. However, the cost of funds would have to fall by 0.5% for the banks to reduce the home loan rates by at least 0.25%. It means the customer-borrower would be affected when the cost of funds inches up whereas the benefit would not be necessarily passed on to him in case cost of funds comes down.

    2.2 According to the news article, existing customers often complain that they are always left out of the rate cuts as most of the offers regarding cut in the home loan rates are applicable only to new customers. Similarly, in rising interest rate scenario banks try to discount the rate to acquire new customers Thus, the old customers lose out both ways, according to the news article.

    2.3 As per the news article, home loan rate is linked to an internally computed reference rate such as prime lending rate (PLR) or mortgage reference rate (MBR). These are determined by the individual banks and are influenced by factors like Repo Rate. Whenever this reference rate increases, it pushes up the home loan rates as well. The news article stated that there remains a gap of a few basis points between the reference rate and effective rate of interest. The said gap varies in case of different borrowers, if the old and new customers are charged different rates.

    2.4 According to the news article, in developed economies the benchmark rate that decides the effective rate on home loans is an external rate and banks do not have complete control over it. In India, the benchmark is the PLR, which is calculated by the bank itself. But the fact is that a bank does not lower the PLR unless the cost of funds falls considerably. The banks offering lower rate of interest to new customers offer a large discount on the benchmark but at the same time they do not lower the PLR or the benchmark rate and avoid passing on the benefit to the old customers.

    2.5 The news article further states that there is always inertia for an existing customer to change the home loan provider when they are already repaying a loan with another bank/HFC. This intention is further deterred by slapping a prepayment penalty if a borrower decides to walk out on the service provider.

  3. MRTPC, while considering the matter for investigation, had framed following issues-

    3.1 The floating rate of interest is ideally linked to external benchmarks, but it appears that the floating rate of interest is linked to internal benchmarks, which goes against the borrowers.

    3.2 The practice of not passing on the benefit of reduction in cost of the fund to the floating rate interest borrowers, charging two different floating rates of interest and the benchmark adopted in calculating the floating rate of interest, prima facie, appear to be unfair, discriminative and restrictive.

  4. The DGIR, MRTPC, during his preliminary inquiry under the provisions of MRTP Act, asked following 12 banks several questions/information and documents for the purpose of the investigation:

  5. Citi Bank

  6. Standard Chartered Bank

  7. ICICI Bank

  8. Axis Bank

  9. ABN Amro Bank

  10. HDFC Bank Limited

  11. State Bank of India

  12. Canara Bank

  13. Punjab National Bank

  14. Bank of India

  15. Indian Bank

  16. Bank of Maharashtra

  17. Out of the most pertinent questions, the following question which identifies the questionable "practice carried on, or decision...

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