Home loan overdraft accounts squeeze banks

Home loan overdraft accounts squeeze banks
03/07/2018 , by , in News/Views

Well-heeled borrowers are parking larger amounts in their home loan overdraft account after running out of options for generating high returns. This has prompted lenders to hold back on offering this product to new customers. The home loan overdraft facility allows the borrower to use the advance as a savings account and transfer surplus funds there. The advantage is that no interest is charged on the home loan to the extent of the extra money kept in the account.

But lenders are unhappy with more money being parked there as they lose out on interest income, while having to make all provisions required for outstanding loans. Traditionally, middle-class borrowers would use any additional funds to prepay loans, while savvy investors would avail of an overdraft facility and park surplus funds there. Kept temporarily, this surplus would be used for another investment.

Now, with both financial markets and real estate in a sluggish state, the idle funds in these overdraft accounts are rising. “If a substantial part of the loan amount is parked in the overdraft account, the bank loses money as there is no interest income but all attendant costs — commission to agents and provision costs — are there,” said a senior official with State Bank of India (SBI).

While banks are not withdrawing the product, they are putting additional conditions to apply for it. Some banks are refusing to take over loans where the customer has parked more than half the loan amount in the account.

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