INDIA BUSINESS WORLD - JULY 2006
THE MONTH THAT WAS...

SC TO STUDY HOUSING LOAN EMIS

The interest burden on most home loans would come down, if the Supreme Court upholds a “cease and desist” order issued by the Monopolies and Restrictive Trade Practices Commission against housing loan major HDFC. HDFC's review petition in the Supreme Court is slated for hearing soon. MRTPC has found HDFC's method of computing interest charges on its home loans to be a “deceptive trade practice”. At stake is the method of annual rest being followed by the lending institution where a monthly rest is more appropriate.

 HDFC and several other home loan providers use the annual rest method and say so up-front in their loan documents. But the commission feels that such disclosure falls short of transparently explaining to the borrower the implications of the terms he agrees to.

The annual rest method provides for the principal amount to be re-accounted, crediting the repayments made every month by way of equated monthly installments (EMIs), only at the end of the financial year. In contrast, in a monthly rest system, the principal amount on which interest is payable is reduced every month. The extent of reduction depends on the loan repayment (amortisation) component of the EMI, which is a combination of both loan repayment and interest payment. The total interest burden would be appreciably lower in the case of monthly rest, as compared to yearly rest. The extent of relief would depend on the duration of the loan.

The MRTP Commission has asked HDFC to stop following the annual rest method. The Supreme Court has asked the commission to respond to HDFC's appeal against the commission's “stop this practice” order, which said the ‘annual rest' system of EMI computation was a ‘deceptive trade practice'.

MRTP held this as a deceptive practice since the consumer is not informed about this way of calculation. In this particular case, the consumer who approached the commission had to pay 0.37% more than the 18% quoted by the institution. Sources told ET that the department of legal affairs is expected to file the reply on the commission's behalf. HDFC spokesman when contacted declined to comment as the issue is subjudice. Industry sources said some banks go for the monthly rest system of deducting principal every month and levying the interest on the reduced principal in the subsequent month, while others follow the annual rest method.

During the hearing, HDFC had informed the commission that the annual rest method was recognised by the National Housing Bank, the principal body to promote housing finance institutions. However, the commission's order last December says NHB has denied this. HDFC filed a review petition before MRTPC in February this year, which was rejected.