RBI panel headed by Anand Sinha releases Draft Report on ‘Pricing of Credit’; suggests Indian Banks Base Rate (IBBR)
RBI panel headed by RBI Deputy Governor Anand Sinha has recommended bringing a benchmark floating interest rate, especially for home loans. Panel also suggested Indian Banks Base Rate (IBBR).
Objective: To inspect the matters linked to inequity in pricing of credit and suggest measures for transparent and suitable pricing of credit under a floating rate regime.
Why there is a need for change in current credit pricing framework?
Notwithstanding the policy attempts to bring transparency and candour to the credit pricing framework, there have been certain concerns from the customer service perspective. These chiefly refer to the downward stickiness of the interest rates, prejudiced handling of old borrowers vis-à-vis fresh borrowers, arbitrary modifications in spreads, etc.
Key recommendations made by the Working Group headed by RBI Deputy Governor Anand Sinha are:
- Banks should be able to prove to the RBI the rationale of their pricing policy i.e. how the bank decided the pricing of a banking product.
- Banks, peculiarly those whose weighted average maturity of deposits is on the lower side should move towards calculating the Base Rate on the basis of incremental cost of funds. More transparency in pricing, less customer complaints, better asset liability management at banks. The Bank boards should make certain that the use of a different methodology in calculating cost of funds should not doesn’t leads to any discrimination amidst borrowers, especially between old and fresh customers.
- Banks should have a Board sanctioned policy delimiting components which are utilized to decide the spread like specific operating cost, credit risk premium and tenor premium, competition, business strategy and customer relationship.
- Bank Board should make certain that any price differentiation is coherent with bank’s credit pricing policy factoring Risk Adjusted Return on Capital (RAROC).
- The internal policy of the Bank should explain the rationale for the spread.
- Except in cases where the credit profile of a customer goes down, the spread charged to an existing customer cannot be raised without properly communicating to the customer at the time of contract. The same information should be properly exhibited by the banks via notices/ website.
- There may be interest rate reset periodicity for the Floating rate loan covenant.
- A sunset clause for Benchmark Prime Lending Rate (BPLR) contracts should be there in order that all the contracts thenceforth are linked to the Base Rate. Banks should ascertain that if any of its customer shifts from BPLR linked loans to Base Rate loans are (s)he should not be charged any extra interest rate or any processing fee.
- Indian Banks Base Rate (IBBR): The RBI panel asked Indian Banks Association (IBA) to develop IBBR, a fresh benchmark for floating interest rate products, which may be compared and released by IBA on a periodical basis. In the beginning, IBBR may be used for home loans. IBBR should comply with the standards benchmarks set by the Committee on Financial Benchmarks. Banks may extend floating rate products linked to the Base Rate, IBBR or any other floating rate benchmark, ascertaining that at the time of sanction, the lending rates should be equal to or above the Base Rate of bank.
- Bring in more transparency in banking which enables comparability amongst banks and informed decision making by customers.
- If there is a pre-payment made by a customer, then any gain of interest reduction on the principal should be given on the day the money is obtained by the bank without holding off for the next EMI cycle date to effect the credit.
- RBI and Banks should both bestow financial education to customer.
- At the point of getting into a contract, the Options of “with exit” and “sans exit” should be given to Customers in case of Retail loans.
- The industry association, IBA, should:
- Build up case studies and illustrations of best practices for customer service;
- Carry on studies to discover areas of best market conduct practices for betterment;
- Train industry representatives
- In Banks the grievances redressal systems should be quick in responding to customers’ demands and the Banks not putting in place enough measures should be penalized by the RBI.