Have Indian banks been infected by the predatory lending virus?

Looks like the staid State Bank of India itself is guilty of baiting consumers with low "teaser" interest rates that increase dramatically to the prevailing rate after a few years of paying the EMI.

When the customer can no longer afford to easily service the loan (pay the EMI), interest and penalties may ratchet the debt noose till it becomes simply too tight - an apt analogy since Indians usually handle their plight with the end of a rope, and not at a bankruptcy court.

The Reserve Bank of India (RBI), the country's banking regulator, made it very clear that it disliked the product. There is more than one thing that the RBI saw wrong with the idea... It said that since existing customers don't get the low interest rates, the "teaser" loans is also discriminatory.

In the Business Standard today... Outgoing State Bank of India (SBI) Chairman OP Bhatt defended the "teaser" home loan rates.

Mr Bhatt termed the RBI's opinion of SBI's "teaser" rate being comparable to US sub-prime loans, as "beyond logic". He said his offering is sold to those who are "absolutely credit-worthy." Mr Bhatt added, "Obviously, they (RBI) have not understood our product."

Yes, perhaps they are credit-worthy when they start out - but what about after the rates are 'reset'? Is the SBI considering future credit-worthiness as well?

Interestingly, after such strong conviction, Mr Bhatt concedes... "but if they (RBI) still insist that this cannot be continued and is against its norms, then we will comply."

He is actually willing to go alongwith an "illogical" opinion! Can he not prove the logic of his product? Is it really that difficult to make the RBI "understand" a banking product?

It would be interesting to see where Mr. OP Bhatt goes after his SBI chairmanship.

In other news today on Business Standard... The RBI came down heavily on some banks which are violating agreements with borrowers on increasing interest rates.

According to the report, some banks raise interest rates every time the benchmark prime lending rate (BPLR) is changed. It is called 'reset clause'.

It basically means that some customers may opt for a 'fixed rate' over a 'floating rate' of interest even though the 'fixed rate' is slightly higher. Only, it not really 'fixed' - banks have the right to 'reset' the 'fixed rate' during the term of a loan... But only after a fixed number of years which is mentioned in the loan contract.

It would seem that some banks simply don't give a damn about loan contract clauses that aren't to their benefit!

No bank is named - but the RBI is said to be looking into all term loan accounts of one Kolkata-based bank against which there was complaint... The reason is that the regulator feels there may be more borrowers who are "suffering in silence"... Unfortunate hard working families that do not even know they are being ripped off by a greedy bank!

The real danger is not that this sort of rapacious bankers are in India, but that they have nothing to fear!

There really isn't a credible deterrent... On the issue of the Kolkata-based bank, all the RBI said was... “In cases where a discrepancy is observed, the same should be rectified immediately and the excess amount refunded to the borrower.”

This is kind of weak wrist-slapping that emboldened Wall Street banks like Goldman Sachs to turn into "a great vampire squid wrapped around the face of humanity" according to an article in Rolling Stone magazine.

(Don't snigger, the cold tentacles of the great vampire squid are already in India.)

Before I leave, I have a question for ALL bankers: Just how much profit is enough? Seriously, will there ever be a time that you will pull your usurous fangs from the throat of humanity?

Just remember, Mr Banker, that one day when his hungry children are in bed, Mr Humanity will step out of his home holding a torch in one hand and a pitchfork in the other. And in the streets, he may not be alone.

You remember that - and that alone.