RBI's directions on disclosure, loan spreads fail to impress bankers

Move likely to improve transparency in loan pricing but lenders see it as over regulation

With the Reserve Bank of India (RBI) instructing banks on a wide range of topics – from spread on advances to the way information should be displayed on their websites – hopes of an early end to regulatory forbearance are fading fast. The moves, however, are expected to benefit borrowers, as the loan pricing mechanism will become more transparent.

On Monday, RBI directed banks to ensure any price differentiation is consistent with their credit pricing policy. In other words, if a bank decides to reduce the spread on loans without changing its base rate both old and new customers will get the benefit of lower interest rate.

Three days later, the regulator asked banks to display interest rates and fees charged on loan products in a prescribed format on their websites to enhance transparency in pricing of credit.

Bankers appear unimpressed but none are willing to offer an official comment.

One of them felt the central bank was trying to micro-manage banks' operations and noted the notification on display of information by banks even specifies the font size (minimum Arial-12) of the key fact sheet.

“It seems to be the return of the regulated pricing regime. There are many borrowers and lenders in the market. The demand and supply situation should automatically determine the pricing. I don't think there was a need to administer the spreads on lending rates,” said a chief financial officer with a mid-sized public sector bank, requesting anonymity. However, existing borrowers often accuse lenders of pricing their loans in a discriminatory manner.

Many have registered complaints on Grahak Seva, the government's customer grievance portal. “I have taken a home loan...At that time, the rate was 10.5 per cent. After that, RBI raised the rate, so they (the bank) also raised the rate. Now, I have seen on their website they are providing 10.25 per cent interest rate to all new customers. This is  cheating,” Amit Agarwal, who took a home loan from a private bank, wrote on the website on May 20, 2014.

While sectoral experts admit, there is a need for greater transparency in loan pricing, many felt regulatory directions would not solve the problem.

“As a consumer with three home loans, I can say the way home loan rates are disclosed and applied by banks still leaves much room for improvement. But, I am not sure if regulatory restrictions are the answer. I think consumer empowerment will happen when there is greater competition and greater flexibility, so that lenders are not complacent,” Shinjini Kumar, leader – banking and capital markets – at PwC in India, told Business Standard.