A reason to be happy for home loan borrowers
Banks must effect any change in floating rate loans only at the agreed-upon reset date, RBI suggested. This aims at ushering in transparent and appropriate pricing of credit, according to an RBI working group. It was suggested by the group that floating rate loan agreements can have interest rates reset monthly, quarterly, half-yearly, etc. This would let the customers know upfront when the rates are due for change. This will improve transparency. This essentially means 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. SBI differs with this view and suggests that change in the base rate should be passed on to the customers.
Spread:
The group also felt that for a 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, unless the credit risk profile of the customer has changed for worse. A loan covenant should be there regarding this.
The group also suggested that the differentiation in pricing of credit should occur only due to specified factors such as competitive conditions, customer relationship and business strategy.
New benchmark:
Indian Banks Base Rate (IBBR) Index has been proposed by the group to improve transparency in the pricing of floating rate loans. It is a benchmark derived from the base rates of some large banks. This will provide uniformity to floating rate loans price. A bank’s specific funding advantages or disadvantages and changes in funding profile will not affect customers. The benchmark will be used across the banking sector. The benchmark may be collated and published by the Indian Banks’ Association on a periodic basis. To begin with, IBBR may be used for home loans.
Source: Hindu Business Line
Association, Banking sector, Banks, Base Rate, benchmark, covenant, credit risk, home loan, ibbr, Indian Banks Base Rate, Interest rate, Loan, pricing of floating rate loans, rate increase, RBI, SBI, spread, strategy
