Monday, 18 January 2010

Caveat Emptor

Caveat Emptor , or let the buyer beware, is a fundamental law in property buying and selling. The buyer is expected to make enquiries and be sure that he is getting what he thinks he is getting. Once the sale is done, he cannot moan about defects that he subsequently finds out.

These days the principle is better deployed in financial transactions. Banks and finance companies spin a complex web around even seemingly simple products. For the mathematically challenged, like yours truly, this is a landmine waiting to explode.

Take the case of an apparently new innovation – teaser home loans. These are loans where the interest rate is fixed at a very attractive rate for a pre determined period and then made floating plus margin thereafter. Buyers are enticed by the low initial rate and don’t realise the consequences of a subsequent high floating rate. Once hooked by the teaser, they are sunk.

Buyers certainly deserve their misfortune if they jump into something blindly. If 2+2 is a very complex equation for you, please get the neighbourhood Einstein to advise you. And beware of anything that looks too good to be true – as we have said a million times before, it sure is too good to be true. Why is it that very intelligent people fall a sucker all the time to that “great” deal. If you are greedy, you deserve the misfortune and no sympathy.

But its not so straightforward as that. Banks thrust a zillion documents at you to sign, with no chance of reading, let alone comprehending the fine print. The legal gobbledegook provides a perfect cover for every coercive activity under the sun. For eg, many a time banks require you to sign a blank promissory note for a loan. Can you imagine that ? A blank promissory note ? Even Shylock didn’t stoop to such levels.

Banks who introduce mind numbing complexity under the guise of innovation deserve to be dealt with in the same way as Singapore deals with people who commit that nation state’s most cardinal offence – peeing in the lift ! In consumer banking you are dealing with laymen – not corporate treasurers (although the distinction sometimes is rather fine). Caveat emptor cannot be used as the fig leaf when something is blatantly incomprehensible to even the guy selling the stuff.

Banking, especially to consumers should become a boring business. Less innovation and more straightforwardness. Fire the suits and ties. Recruit the guys in langots. Before you see a loan, tell the guy a hundred times why he should not take a loan. If warnings such as “remove the baby before folding the pram” is required by law, why isn’t there stringent warnings required before plunging into financial madness. Like teaser loans.

All applicants for loans must be told to hold their ears and do 1008 thoppukarnams (a form of punishment usually meted to young boys in South India), before they become eligible for the loan. Given that most are anatomically ill equipped to complete this task, they would hopefully give up and go away. At least they earn the religious piety that the act of thoppukarnam confers. Thank God for small mercies.


Sandhya Sriram said...

1008 thoppukarnam - thank god i got my housing loan before someone read this blog. otherwise, for abundant ppl like me, loans would have become a desire reserved for fulfilment in the next janma :-)

After having burnt not just my fingers but almost my entire self trying to get my housing loan, there is one thing i have realized.

the harder the loan is to get, the better the deal you have won. if you go to a nationalized bank, they put you through 101 procedures including things like my poor retired father standing guarantee with declaration of all the little assets he has built in his lifetime to securitize my loan, but then, once the loan is thru, but then the deal is transparent after that. whereas in the case of private banks, while loans are provided at your door step, thats the step into the dragon and you do not know where you swing and where you sink.

but agree with you. banks should be treated worser than the pram manufacturers.

gils said...

ROTFL :D 1008 thopukaranama :D :D naan lifelong potukitay iruka vendi thaan :D :D i hate to read docs..appa thaaan atuhkelam inchargea iruntha :) he will read every line like a lawyer and wud pick out points which are ambiguous. i dnt think i wud ever be tht patient to go thru all those crap. Even if it comes back to bite me..i think ppl like me who are born lazy wud never ever realise their folly.

gils said...

in mine and my fellow lazy bones defence..the banks make sure that the docs are so dry n vague that..even if one want to read them..beyond first two page we loose interest or lost in that quagmire. maybe they shd make them more readable.

Adesh Sidhu said...

When I bought my home, more than bankers, it was my broker who was confident that I will get the loan. He knew more than many bank associates who are 12th grade pass and whose job is only to get papers sign.
You are right as a consumer, I did not read even a single paper/agreement sent by bank.

VA said...

This one is closely linked to one of your earlier posts on Maclaren strollers. I do remember Kiwi's strong words and exactly second his ideas. Mandatory requirement of a warning for products such as loans, which are highly driven by urgent human needs and scarce monetary sources, may not even matter for the buyer ultimately. However, the law should be uniform enough to avoid any legal shortcomings in the process. On a second thought, the question is how uniform it should be?

Ramesh said...

@sandhya - very perceptive observation; the harder a loan is to get, the better the deal. Actually the verification process of the nationalised bank is a rigorous evaluation of whether the borrower can repay the loan. It is in both parties' interest. The easy doorstep loan is just that there is no evaluation process of ability to repay. The customer service of the nationalised banks is actually better in this case.

@gils - you are not a lazy guy at all, but your point is actually valid. Legal crap has to be replaced with readable plain English. The law actually must be amended that the clauses must be read by a complete layman, understood by him (he has to pass a test !); else the clauses are illegal !!

@Adesh - Yes we all sign withoutb reading. As long as we keep repaying there isn't a problem; its when we can't do so that what we have signed comes to haunt us.

@VA - Yes the warnings may not matter too much but at least its one more defence against taking a loan which you can't afford. Many a time the problem is a person only sees his need; doesn't see the consequences of trying to fulfuill the need. At least loud warnings may ring a bell. If he still plunges and gets burnt, he deserves it !

Deepa said...

The villian in me and my hubby's love story is actually a 'Home Loan'. We had to stay away from each other for 2 months post marriage thanks to a stupid home loan. But I agree totally with Sandhya. You may be frustrated with the million docs asked by nationalized banks, but you don't have to worry later. Pvt banks on the other hand are, like you rightly said, worse than Shylock. But I know of many 'home loan seekers' now, and it is so difficult to explain to them this catch. They are just stuck on this fact that the loan is processed in 4-5 days, and first 2 yrs is 8%. Just 1 yr ago, ICICI had raised the rates to 13.5% when everyone was at 9; not to forget the charges on principal repayment.

'Thoppukarnams' actually is what they deserve if they go ahead, after others warning them too!

Ramesh said...

@Deepa - Oh really - that's too much when a bank has a say in love life !!

Speed and diligence are two different things. A private bank can be diligent and fast. Its when they equate speed with slackness that trouble happens.

Srivats said...

hahah thank god I wasnt asked to make 1008 thopukaranams, but I wasn greedy , it was just 800 sq flat out of city so the loan amt was very small, thanks to SBI so ppl like me can dream and own a home :)

And in my case I trust not just einstin next door but ppl like u :)

Viji said...

Ramesh - The idea of Thoppukaranams will do a lot of good for our present day lifestyle and give us a forcible exercise. It probably will set your brain cells ticking and make one realise the fine print (you may still have something between the lines for which another 1008 may be reqd).
Either way, good old nationalised banck Zindabad for their straightforward and boring approach to loans.

Ramesh said...

@Viji - ha ha. I'm not sure many will actually be able to complete 1008 !! The marriage of the diligence of the nationalised bank with the service orientation of the private banks would be a heady mix.

@Sri - As a fighting fit handsome young man, 1008 should be an easy achievement ! Lol !

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