The Reserve Bank of India (RBI), on Thursday, suggested measures for transparent and appropriate pricing of credit under a floating rate regime.
The working group on pricing of credit, set up by the RBI, recommended that the Indian Banks’ Association (IBA) develop a new benchmark for floating interest rate products, namely, the Indian Banks Base Rate (IBBR), which may be collated and published by the IBA on a periodic basis. To begin with, the working group said, “IBBR may be used for home loans.” “It would be desirable that banks, particularly those whose weighted average maturity of deposits is on the lower side, 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,” said the working group. “The board of a bank should ensure that any price differentiation is consistent with bank’s credit pricing policy factoring Risk Adjusted Return on Capital (RAROC). Banks should be able to demonstrate to the RBI the rationale of the pricing policy.”
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 working group suggested.
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 Benchmark Prime Lending Rate contracts so that all the contracts thereafter are linked to the Base Rate.
Pre-paymentsThe working group has also said that 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 working group said that customers should have a choice of ‘with exit’ and ‘sans exit’ options at the time of entering the contract.
