RBI panel against price discrimination in loans

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Banks should not resort to price discrimination in loans if customers have same credit profiles, a panel set up by the Reserve Bank of India (RBI) has said.

This will be music to the ears of corporate borrowers, as reset clauses are generally offered on loans to companies. A reset clause allows lenders to review rates at the end of a certain number of years. Long-term loans, including home loans, have reset clauses.

RBI had set up the working group, headed by former deputy governor Anand Sinha, to study credit pricing. The group, in a reversal of an earlier RBI stand, has accepted that there would be differential pricing for old and new customers.

But it said lenders should keep floating loan rates steady even at the time of the reset, unless there is a change in the base rate or in the credit profile of the customer. "If there is a change in the policy rate of the central bank, it should impact the base rate with a lag and, not necessarily the interest rate of loans," it said.

RBI released the recommendations as a discussion paper for feedback from banks.

"The working group agreed that while price differentiation among old and new customers will remain where the base

rate is calculated on the basis

of the weighted average cost of deposits, price discrimination cannot be accepted," the paper said.

"In case there is a change in policy rate by the central bank, it should impact the benchmark, albeit with a lag, and not the spread component of the interest rate," it suggested.

The panel has also suggested that the Indian Banks' Association should develop a benchmark for floating rates and publish it periodically. At the time of lending, a bank should consult this benchmark, in case of home loans to start with.

“Banks with a higher reliance on the low-cost current account and savings account (Casa) deposits should bring down their base rates in sync with the policy rate movements. However, any change in the base rate should not impact the cost of a loan as long as the margin expectations are fulfilled,” the panel said.

It has mooted the idea of computing the base rate on the marginal cost of funds rather than a historical or average cost of funds. "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," the working group said, adding that whatever method a bank uses should not lead to any discrimination among borrowers.

The stickiness in the base rate is when banks rely on interest-bearing deposits, which are fixed in nature, and they do not have the flexibility to pass on the impact of accommodative policy action immediately as their cost of funds represented by the cost of fixed deposits does not decrease immediately.

By and large, banks compute the base rate based on the weighted average cost of deposits, and hence, their base rates do not allow for immediate downward adjustments. The full impact can be seen only after the bulk of existing fixed rate deposits gets rolled over at lower rates on maturity.

Pricing of loans is calculated on base rate and spread. The spread comprises various factors such as product-specific operating cost, credit risk premium, tenure premium, competition, strategy and customer relationship. While the lending rate remains same in the case of a fixed rate loan, it is dynamically reset at specified intervals in the case of floating rate loans, based on the movements in the benchmark rate. The panel has recommended changes in interest rates at periodic intervals.

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