Relief on cards for home loan borrowers

If you are a home loan borrower, there may be some good news. The RBI has suggested that banks must effect any change in floating rate loans only at the agreed-upon reset date.

This is aimed at ushering in transparent and appropriate pricing of credit, according to an RBI working group.

The group has suggested that floating rate loan agreements can have interest rates reset monthly, quarterly, half-yearly, etc.

It said once loans are reset on the date agreed upon in the agreement, the customer would know upfront when the rates are due for change, thereby improving transparency. What this means is that any change in the base rate (the minimum rate below which banks cannot lend) need not result in an immediate change in the floating interest rate on existing loans.

State Bank of India, which was a member of the group, however, held the view that whenever there is a change in the base rate, such changes should be passed on to the customers.

The panel felt that for a given customer, once a spread (mark-up over the base rate) has been determined after looking at all factors, including the customer’s credit profile, customer relationship with bank, strategy, etc, it should not be increased except when it may involve deterioration in the credit risk profile of the customer.

There should be a loan covenant to this effect. Apart from this, the working group said other external factors should not impact the contracted spread for a given customer.

The group has also suggested that bank boards must ensure that customers are not discriminated against and that the differentiation in pricing of credit will occur only due to specified factors such as competitive conditions, customer relationship and business strategy.

To improve transparency in the pricing of floating rate loans, the panel has proposed a new benchmark — Indian Banks Base Rate (IBBR) Index — which is a benchmark derived from the base rates of some large banks.

The use of IBBR will help floating rate loans prices to move in tandem. A bank’s specific funding advantages or disadvantages and changes in funding profile will not affect customers.

Further, as the IBBR will be based on major banks across the system, changes in base rates of a few banks will have limited impact on the index. Being an industry-wide index, it is likely to find better acceptance.

The IBBR may be collated and published by the Indian Banks’ Association on a periodic basis, it said. To begin with, IBBR may be used for home loans.