RBI For Transparency In Home Loan Rate Hikes

The practices by banks for increasing housing loan interest rates for existing borrowers could be in for a complete overhaul, with the RBI Governor, Y V Reddy, taking exception to such methods.

Reddy yesterday took exception to the arbitrary increase in interest rates on fixed rate home loans without any linkage to any benchmark, banking sources said.

While addressing a meeting of bankers yesterday, the RBI governor said that “There have been too many (interest rate) increases and banks have taken coercive steps for recovery. As banks, we should not bring in such unsocial elements. Banks should be transparent. Banks should not keep on revising interest rates”. This was revealed by the chairman of a leading public sector bank.

“These issues need to be sorted out and smoothened,” the chairman of another public sector bank, who also did not want to be named, said.

A senior banking official said a floating rate in the international parlance is fixed re-pricing. For instance, if a loan is linked to 91-day, 181-day treasury bills or the 10-year government paper and the spread is at 2 percentage points above the benchmark rate, then the floating rate is reset every six months and not as the benchmark rate changes.

Reddy said, “We have got certain complaints about non-transparent and non-fair pricing. That is why we want banks to assure us that is not (the case). Even fixed rates apparently have a clause, which says it may be changed if something happens.

So, the so-called fixed rate is not all that fixed. (On) What basis it is re-fixed, there is no idea. Constantly, say, you cannot increase it (rates) by 50 basis points; there has to be some reasonableness. That is what we want. The lender should be able to justify the interest and be able to give the calculation to the customer if he wants.”

In India, banks revise floating rate loans without any specific periodicity. “It is unscientific. There is no periodicity on variability of the floating rate,” the official said.

The benchmark rate has certain stickiness. In the last couple of years, banks have increased benchmark rates only when there has been too much pressure.

Internationally, both on the assets and liabilities side, the spread is always anchored. In India, the variable rate is not there on the deposit product.

Bankers said banks should be allowed to have segmental PLRs so that a home loan PLR gets changed according to the asset-liability movements in this particular portfolio only.

This is not the first time that the RBI has raised the issue of banks re-pricing fixed rate home loans in a non-transparent manner. The department of banking supervision had raised this issue with the Indian Banks Association (IBA) in the past as well. It had also raised questions on banks not revising the base rate but changing the lending rates on particular products.

“Banks have to take steps to de-risk their portfolio. Even if the home loan is a fixed rate loan, due to exceptional situations banks may have to revise the rates during the tenure of the loan. It is not possible for the bank to analyse such risks upfront while granting the loan,’’ said a senior private sector banker.

“Other than the capital, we don’t have any major source of funding long term assets like home loans which have a tenure of up to 25 years. Term deposits normally are for three to five years and the customer also has the option of premature withdrawal. The economic scenario, which includes the cost of funds, inflation, interest rate scenario in the country, cannot be the same for 25 years and hence, there is a need to de-risk ourselves from any sharp economic change.”

Normally banks and institutions in their contract document state that the interest rate for the loan product will be reset after two or three years.

“In the Indian context, it is very easy to blame a bank for lack of transparency and fairness. In the western world, liabilities and loans are linked to benchmark rates. Accordingly, the rate of interest gets reset. The RBI permits banks to introduce floating rate deposits linked to a benchmark rate and select banks had tried launching such products. There were no takers. In India we have all the tools to de-risk a consumer, but what about the banks,’’ questioned another private sector banker.