The working group has also said the bankers’ industry body may develop a new benchmark for floating interest rate products which may be implemented starting with home loans.
A working group of experts constituted by the Reserve Bank of India (RBI) has suggested norms for credit spread charged by banks and has asked for a sunset clause to move all previous lending contracts under benchmark prime lending rate or BPLR to the new base rate system.
The working group was set up under the chairmanship of former deputy governor of RBI Anand Sinha to suggest measures to end downward stickiness of the interest rates, discriminatory treatment of old borrowers compared with new customers, arbitrary charges besides recommending measures for transparent and appropriate pricing of credit under a floating rate regime.
Here are the highlights of the suggestions of the group
Banks, particularly those whose weighted average maturity of deposits is on the lower side, should move towards computing the ‘base rate’ on the basis of marginal cost of funds. This may result in more transparency in pricing, reduced customer complaints, better transmission of changes in the policy rate and improved asset liability management at banks. It added that if banks use weighted average cost of funds because of their deposits profile or any other methodology that may result in differentiation between old and new customers, the boards of banks should ensure that this differentiation does not lead to any discrimination amongst borrowers.
Apart from factors like specific operating cost, credit risk premium and tenor premium, broad factors, such as, competition, business strategy and customer relationship are also used to determine the spread. Banks should have a board approved policy delineating these components.
Banks’ internal policy must spell out the rationale for, and range of, the spread in the case of a given borrower, as also, the delegation of powers in respect of loan pricing.
The spread charged to an existing customer cannot be increased except on account of deterioration in the credit risk profile of the customer. The customer should be informed of this at the time of contract.
The floating rate loan covenant may have interest rate reset periodicity and the resets may be done on those dates only, irrespective of changes made to the base rate within the reset period.
There may be a sunset clause for BPLR contracts so that all the contracts thereafter are linked to the base rate. Banks may ensure that these customers who shift from BPLR linked loans to base rate loans are not charged any additional interest rate or any processing fee for such switch-over.
The bankers’ industry body may develop a new benchmark for floating interest rate products, namely, the Indian Banks Base Rate (IBBR), which may be collated and published on a periodic basis. Banks may consider offering floating rate products linked to the base rate, IBBR or any other floating rate benchmark ensuring that at the time of sanction, the lending rates should be equal to or above the base rate of bank. To begin with, IBBR may be used for home loans.
The benefit of interest reduction on the principal on account of pre-payments should be given on the day the money is received by the bank without waiting for the next EMI cycle date to effect the credit.
For retail loans, the customers should have a choice of ‘with exit’ and ‘sans exit’ options at the time of entering the contract. The exit option can be priced differentially but reasonably. The exit option should be easily exercisable by the customer with minimum notice period and without impediments. This would address issues of borrowers being locked into contracts, serve as a consumer protection measure and also help enhance competition. Further, the industry body should evolve a set of guidelines for easier and quicker transfer of loans, particularly mortgage/housing loans. There could also be penalties for banks which do not cooperate with borrowers in this regard.
(Edited by Joby Puthuparampil Johnson)