RBI provides relief for home loan customers as loans are set to become more transparent

Mumbai:  Home loan borrowers can now expect more fair play when it comes to pricing which will now be decided by markets rather than banks.

The Reserve Bank of India (RBI) has said 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 N.S. 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.

The RBI move is expected to enhance the transparency for the home loan customers. 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 (PLR), 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.

Putting an end to the confusion of multiple benchmarks, the RBI 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.