Staging a return to the basics

When all other lenders were charging up to 10% interest on home loans, one bank announced an unprecedented 8% rate. No, it wasn’t one of those aggressive private banks or even an extremely rich MNC one. It was the public sector behemoth, SBI, till date the upholder of everything staid. SBI’s offer triggered an interest rate war in the home loan market. What many customers didn’t realise was that 8% was a teaser rate applicable only in the first year. After 12 months, the prevailing rate of interest would apply. And you thought PSU banks did not believe in marketing gimmicks.

Don’t be taken in by numbers. Before you avail of any offer, work out the effective rates throughout the loan tenure. Many banks have introduced a reset clause in their long-term loans and it would be prudent to question how ‘fixed’ is the rate you are being offered. You don’t want to be stuck with a ‘fixed’ interest rate that can be hiked every three years, right?

Bankers seem to have abandoned the role of big bad wolf this year. A host of customer-friendly innovations have been introduced in the past few months; some made financial transactions much safer, others focused on making the sector more transparent. As Shyam Srinivasan, head, consumer banking, Standard Chartered Bank puts it, “This past year, the banking sector has seen a transition from product focus to customer focus. In the aftermath of the global financial crisis, banks are becoming more sensitive about whom they are banking with.”

One important takeaway for consumers is that the credit report is fast becoming a decisive factor for gaining access to bank credit. If you have a poor track record (read late payments and defaults, maxed out cards and too many loans), you will be penalised by way of higher interest rates. Conversely, there are rewards for good customers and, in the next few years, differential pricing will become even more pronounced. In the West, credit reports also factor in other details such as phone and utility bill payment history, which helps if a person with no credit history wants a loan or a credit card.

Credit bureaus in India too have started to follow this trend. Cibil, for one, seems keen to add telecom-related delinquencies to its database. The lesson? Start paying every bill on time and in full. You never know which missed payment leads to your loan application being red-flagged.

While the banking regulator is imposing checks and balances to make online transactions more secure, the new 3-D services like Verified by Visa are not foolproof. The unchecked rise of online scams is proof enough. For instance, the secure transaction password can fall prey to keyloggers. The most basic precaution is to consider the use of backspace and clear keys when typing your passwords (see Banking on Change, November 2009).

The final lesson is that there are no free lunches. Banks offer a slew of services. The basics are free in a no-frills account, but if you want the convenience of home banking and an overdraft facility, you will have to shell out more cash.

• Don’t be lured by teaser rates; work out effective rates during the loan tenure or the cost of revolving credit when the introductory period ends.
• Concentrate on polishing up not only your credit history but also phone bill payment records. In a differential pricing regime, this becomes a key factor.
• The new 3-D services like Verified by Visa are an added precaution, but not foolproof. Use backspace and clear keys when typing your passwords.
• You can now decide what you want to pay for the services you seek, but with the added responsibility of a cost-benefit analysis.