The Reserve Bank of India (RBI) has come down heavily on banks for charging different interest rates to customers with similar profiles, saying such discrimination cannot be accepted. To study credit pricing, RBI had formed a working group headed by Anand Sinha, former deputy governor of the central bank. The panel’s report, made public on Thursday, has suggested stringent norms to make loan pricing more transparent. “The working group recommends the spread charged to an existing customer cannot be increased except on account of deterioration in the customer’s credit risk profile,” RBI said. Often, banks offer lower interest rates, especially on home loans, to new customers, while old customers continue to pay high rates. The committee has said while banks raise interest rates across the board immediately after a rate rise, they tend to resist a cut in interest if the monetary policy is accommodative. Acknowledging factors such as competition and customer relationship are taken into account while deciding the spread, banks have been asked to adopt a board-approved policy delineating these components. “The board of a bank should ensure any price differentiation is consistent with the bank’s credit pricing policy, factoring risk-adjusted return on capital,” the panel said.
Also, banks should be able to demonstrate to RBI the rationale of the pricing policy, it added. The group also recommended banks’ internal policies must specify the rationale for, and range of, the spread in the case of a borrower, and the delegation of powers, in case of loan-pricing.
To correct the downward rigidity on base rate, a benchmark reference rate for all loans, the committee suggested banks consider a marginal cost of funds while computing the base rate, especially if a lender’s average maturity of deposit was on the lower side. “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,” RBI said. The committee recommended the floating rate loan covenant have interest rate reset periodicity and the resets be done on those dates alone, irrespective of the changes to the base rate within the reset period. However, State Bank of India, India’s largest lender, has said any change in base rate has to be passed on to customers. Asking banks to refrain from charging customers higher spreads and processing fee when they shifted their loans from the erstwhile benchmark prime lending rate (BPLR) to base rate, the committee recommended a sunset clause on BPLR-linked loans. Highlighting the need to evolve a separate benchmark for floating loans, especially housing loans, the Indian Banks’ Association has been mandated to evolve a base rate, IBA base rate, which all banks could follow to fix interest rates. IBA has also been asked to prepare a standard terminology to be used by all banks to help customers compare loan rates and charges across banks. IBA has also been asked to evolve a set of guidelines for easier and quicker transfer of loans, particularly mortgage/housing loans. The panel has recommended penalties for banks that do not cooperate with borrowers who want to transfer loans. The working group also recommended banks provide a range of annual percentage rate (APR), representing the total cost of credit on a loan on an annualised basis. This will allow customers to compare the costs associated with borrowing across products and/or lenders. In the case of retail loans, the committee emphasised on customers having a choice of “with exit” and “sans exit” options at the time of signing the contract. “The exit option can be priced differentially, but reasonably. It should be easily exercisable by the customer, with the minimum notice period and without impediments. This will address the issues of borrowers being locked into contracts, serve as a consumer protection measure and help enhance competition,” it said.
| PRESCRIPTION FOR BETTER CUSTOMER SERVICE – RBI WORKING GROUP’S RECOMMENDATIONS |
- For calculating base rate, the marginal cost of funds be factored if average maturity of deposit is lower
- Go by board-approved policy to decide spread
- Spread can only be increased if credit risk profile of customer deteriorates
- Floating rate loan covenant to have interest-rate reset periodicity and resets allowed on those dates only
- Sunset clause for benchmark prime lending rate, no extra spread/fees when customer shifts to base rate
- IBA to develop new benchmark for floating loans
- Publish interest rates, fees and charges on websites
- Provide annual percentage rate (APR) representing the total cost of credit on an annualised basis
- Uniform terminology to be used by all banks
- Standardised loan format for retail customers covering terms and conditions
- Benefit of interest reduction while pre-payments to be given on the day the money is received by bank and not to wait for the next EMI cycle date