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Spread Clause on Variable Rate Loans:
Variable-rate loans are loans that are bench-marked to the MCLR (Marginal Cost of Fund based Lending Rate) of the bank with a spread charged on the MCLR.
- MCLR is based on the cost of funds for banks and is derived as the sum of the marginal cost of funds, negative carry on account of CRR, operating costs of banks and tenor premium. MCLR is revised by the banks on a regular interval in response to changes in policy rates and the bank’s internal cost structures.
- Spread, on the other hand, is calculated based on customer-specific factors such as credit premium to be charged for the borrower (based on his creditworthiness) and account-specific operating expenses.
- Banks retain the right to change the spread on loans based on factors such as tenure premium, market conditions, exceptional circumstances, changes in internal policies and retain the right to do so without disclosing the calculation to the customer. This clause has been misused by a few banks to lock-in customers at low rates of interest and then increase the applicable rate of interest arbitrarily after a few months.
- Bank may also change the spread if the credit profile of the borrower has changed significantly than what it was at the time of loan disbursement.
This clause takes away the essence bench-marking of a loan and is clearly against the dictum of RBI. As a customer, you have the right to negotiate with your lender to remove the clause at the time of agreement signing and protect your financial liability. Even if you fail to notice this clause at the time of agreement signing, you may always approach the Banking Ombudsman, in case your bank decides to increase the spread on your home loan on one fine day. Banking Ombudsman has passed many judgments favoring the customers in these kinds of cases.