Monday, 10 December 2018

Relief for home loan customers; loans to become more transparent

Home loan borrowers can now rejoice as the Reserve Bank of India (RBI) on December 5 in its fifth bi-monthly policy meet proposed that floating rate home loans will now be benchmarked against an
external benchmark from April 1, 2019. This is expected to enhance the transparency for the home loan customers.

RBI has suggested the use of external benchmarks such as the repo rate, 91-day Treasury bill yield or the 182-day Treasury bill yield produced by Financial Benchmarks India (FBIL). The RBI has also allowed banks to choose any other benchmark market interest rate produced by FBIL.

This comes as a big respite to home loan borrowers, many of whom have perennially complained that the banks were quick to raise the rate of interest when the rates in the economy were going up but were slow to reduce the rate of interest on home loans. Further, over the years, different methods were used to fix the loan rates and how they were to move over time, in line with rising and falling rates in the economy, such as prime lending rate, bank prime lending rate (BPLR) and marginal cost of lending rate (MCLR) in the past. All these benchmarks were internal to the bank and experts say that neither pro-actively passed on the benefits to the customers.

To overcome the situation, the regulator brought in MCLR-based products in April 2016. An MCLR linked home loan product would have three component to it. Let’s understand this with an example. MCLR 6 months + 0.4%. Here the bank used to mention its MCLR – says 8.6%. 0.4% used to be the spread to be charged over the MCLR. That would mean that in the above case the applicable rate of interest would be (8.6% + 0.4% =) 9%. And in the above case, the rate used to get revised every six months. At the time of getting a home loan, a client is expected to know all three factors – MCLR, the spread and the frequency of the revision.

The RBI policy statement has made it clear that the banks cannot offer multiple benchmark for their loan products in one category going forward. Existing products based on PLR, BPLR and MCLR will soon become history. This will lead to standardisation of the home loan products and customers will find it easy to understand the products and pick one that suits their needs.

In the new regime the benchmark being external, the banks won’t control the rates at their advantage. The customers can effectively compare the offers across lenders and ascertain which banks they want to go to.

Though the new system of external benchmarks mean effective transmission of interest rates, it also means that the home loans will be priced taking into account market forces. As per the new recommendations, the spread will be ascertained at the time of disbursement of loan and can be changed only if borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract.

A missed credit card payment or a missed loan instalment of a particular month could be construed as events that could harm your credit worthiness in this context.

As the home loans make a transition from the MCLR-based system to such external benchmarks, the rate of interest may see some changes.

The final guidelines will be out by December-end this year.


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