Loan mispricing, transparency under scanner

To curb the mispricing of risks and the lack of transparency in loan pricing, the Reserve Bank of India (RBI) will set a group to suggest ways to have a transparent and non-discriminatory regime.

In a deregulated environment, transparency in pricing is crucial to ensure the risk is priced adequately and borrowers are charged interest in a fair manner, RBI said in its half-yearly review of monetary and credit policy.

RBI said it had come across instances of risk mispricing and lack of transparency, especially for floating rates loans. Also, in some cases, the spread charged to a customer has been revised upward frequently during the tenure of the floating rate loan.

As a consequence, the existing customers are at a disadvantage, compared with new customers with the same credit rating, leading to customers complaining about discrimination.

While the base rate can change depending on the cost of funds, the spread over the base rate can change only when components of the spread change.

Banks have to determine interest rates on advances with reference to the base rate by adding a spread reflecting product specific charges together with term premium and risk premium.

The base rate system was introduced with effect from July 1, 2010, under which all categories of loans and advances are priced with reference to the base rate and banks are not permitted to lend below the rate.

Meanwhile, taking into account the present economic pressure and restructuring of loans, it has decided form a working group to look into existing norms. It would also suggest revisions, taking into account the best international practices and accounting standards.

The restructuring guidelines, last revised in August 2008, have generally helped both the lenders and borrowers, especially during economic downturns. However, the central bank has received requests from stakeholders to review the restructuring guidelines in the light of experience gained.