Compare Listings

From April, home loans to be decided by markets

From April, home loans to be decided by markets

Borrowers can now expect more  fairplay when it comes to pricing of home loans which will now be decided by markets rather than banks.

HIGHLIGHTS

  • RBI said from April 2019, it will be mandatory for banks to link all floating rate loans
  • Besides improved transparency, an external benchmark is expected to result in improved transmission of rates

The RBI said on Wednesday that from April 2019, it will be mandatory for banks to link all floating rate loans, which are extended to individuals and small business, to an external benchmark. This benchmark can be the RBI’s repo rate, yield on the 91-day or 181-day treasury bill, or any other yardstick 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 actual cost of loan will be at a spread over the benchmark and the spread will be constant throughout the tenure of the loan unless there is a change in the credit worthiness of the borrower.

Citibank is the only lender in India that uses external benchmark for home loans. 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.

Besides improved transparency, an external benchmark is expected to result in improved transmission of rates. The effectiveness of the RBI’s policy in stimulating demand or curbing it will work only if banks pass on its rate actions. It has been seen in the past that banks try to protect their margins by not bringing down rates in line with the RBI’s rate cuts or during growth phases they refuse to pass on rate hikes, resulting in loans continuing to grow despite the apex bank’s efforts to curb demand. With an external benchmark, banks will have no choice.

The move to have an external benchmark was first proposed by a committee headed by Janak Raj, principal adviser at RBI’s monetary policy department. For several years now, the RBI has been trying to address the issue of floating rate loans, which move up easily when market rates rise but tend to be sticky when interest rates come down. Banks have been managing to vary 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 problems of having multiple rates.

Source : TimesOfIndia

img

Axiom Landbase

Related posts

M3M Records 500 Crores Of Sales Within 14 Days Of The Launch Of ‘Port Your Property’ Campaign

M3M Group in association with PYP introduces a campaign redefining the rules of Indian Real...

Continue reading
by Axiom Landbase

M3M buys 25-Acre Land on Gurugram Golf Course Extension Road for Housing Project

Realty firm M3M India Ltd has acquired 25 acres of land in Gurugram, Haryana for around ₹250...

Continue reading
by Axiom Landbase

M3M delivers 8 real estate projects in a span of 3 months with a total of 30 lakh sqft area

With the latest announcement of delivery of its five marquee projects - M3M Sierra, M3M Natura, M3M...

Continue reading
by Axiom Landbase

ENQUIRE NOW