Thursday, April 14, 2011

The myth of spread change "facility"

(Note: I'm really sorry that this post has not been phrased properly and readers many find the post unorganized and points scattered. )

HDFC boasts of providing you with the convenience of increasing your spread (thereby reducing your interest rate) by paying a so called "conversion fee"

Before going into the details, here are the facts about the "conversion fee"
1. HDFC doesn't give any acknowledgement of the fees paid (Though they pay service tax on the amount  you pay)
2. The conversion fee is NEVER reflected into your account statement
3. The conversion fee is not "seen" online. It won't reflect in any of the "transactions" like EMI, prepayment etc
4. The formula of the conversion fee changes all the times. Ask HDFC about how many times they have changed the formula.
5. The letter you get after spread conversion doesn't at all mention about the amount you paid as a fee. It doesn't even say anything like "subject to realization of cheque etc etc"

In short, HDFC makes sure that the conversion fee is never documented, atleast at the places where the customer can see it. They might record it internally, but for a customer it is completely hidden.

When hard pressed for the receipt, what they give is a copy mentioning it as "conversion". You may draw your own inferences.

Now let's look at HDFC's claim that atleast they provide this facility, compared with other banks who do not do so.

From my experience, HDFC's PLR is like the horse that moves 4 steps forward, and 1 step backward. So when i took the loan in July 2008, it was 13.5, while now it's 15.5. Anyone can tell you that market conditions in July 2008, and April 2010 are relatively comparable. If you compare the interest rates that were being offered in 2008 then you'll find that they were slightly lower than that are being offered today.

But the similar thing doesn't apply to those who have taken loan from HDFC in july 2008.
Whoever took the loan from HDFC in July 2008 would have been offered the interest rate of 10.25 (give or take 0.5 depending on your credit worthyness), while the same would have been 12.25 by now.

Now new customers get it at 9.75 from HDFC. The old customers can also get down to 9.75 but then they must have either paid 0.5% (of the outstanding principal) 3 times to keep up with the new customers, or 1.5% in one shot.

This is what happens when you "avail" the facility of "spread change" provided by HDFC.
I would request you to write down the "lowest spread" you had on your account, then the readers can determine that the rate of interest you would have to pay had you not approached them for spread conversion.

From my experience, to keep one's interest rate down and comparable to the new customers, an average HDFC customer has to pay 0.5% (of the outstanding principal) every year. Calculate this for your tenure of the loan and you'll get to know why it's a myth and HDFC is not doing any favours to you.

Let me know your experiences and opinions on the same. 


  1. I 100% agree with you. That is true.

  2. Totally agree with you. The "floating" part of loan agreement is totally done away with by HDFC. My experience is that when HDFC was having higher cost of funds (even for new loans) - they passed the burden fully to existing customers (Poor old locked in me...)
    and when the cost of funds was low - they passed benefits only marginally - and used the remaining benefits in acquiring more customers..

  3. You are absolutely right, they take 0.5% of your outstanding principle every year and will not give you a receipt or anything for that matter, RBI should look into this and stop the unethical practices by HDFC to have a uniform and transparent interest rates.

  4. Thanks Raj for the comment.
    Look at another portal calling it as a "facility":