From April, Markets will decide home loans rather than Banks

 MUMBAI:The RBI said on Wednesday that from April 2019, it will be obligatory for banks to sync all floating rate loans, which are extended to individuals and small business, to an external benchmark. Borrowers can now expect more equity when it comes to pricing of home loans which will now be decided by markets rather than official  banks. This benchmark can be the RBI’s repo rate, yield on the 91-day or 181-day treasury bill produced by the Financial Benchmarks of India.

“We have been moving towards enhancing transparency on loans. As part of this, we moved from base rate to marginal cost of lending rate. In furtherance of this objective, we are making it mandatory for banks to link personal and SME loans after April 2019,” RBI deputy governor NS Vishwanathan, said.

The original cost of loan will be at a spread over the basic and the spread will be constant throughout the occupancy of the loan unless there is a change in the credit worthiness of the borrower.

The only lender in India that uses external benchmark for home loans is Citibank. In March this year, the bank had introduced a home loan scheme where the rate of interest was linked to the government’s 91-day treasury bill. “We believe the use of external benchmarks for floating-rate home loans provides transparency to the end consumer. We have seen a favorable response since its launch in March 2018, with 95% of all new bookings opting for our three-month T-bill rate-linked home loan product,” Rohit Ranjan, head of secured lending, Citibank India, said.

The move to have an external criterion was first introduced by a committee headed by Janak Raj, principal adviser at RBI’s monetary policy department. For many years now, the RBI has been trying to attend the issue of floating rate loans, which move up easily when market rates heap but tend to be sticky when interest rates come down. Banks have been managing to differentiate rates for new borrowers by varying the spread at which they extend loan. To address this RBI asked banks to replace PLR with the marginal cost of lending rate (MCLR). MCLR, which was to be based on the incremental cost of funds, came with its own issue of having multiple rates.