Home loan borrowers to get fair treatment now, both old and new loans to reflect rate change equally

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New Delhi: It has been a long-standing complaint of home loan borrowers that banks manipulate the floating rate benchmark to offer attractive rates to new customers without giving the same benefit to old customers.

Till now, banks and housing finance companies used to give the benefit of RBI repo rate cut only to new home loan borrowers first while old customers used to get the benefit later. But now this is unlikely to happen as the Reserve Bank now made it mandatory to link all floating rate loans like home, auto loans to an external benchmark starting from April 1, 2019. This benchmark can be the RBI repo rate, yield on 91-days Treasury bill or any other benchmark produced by the Financial Benchmarks of India, the Times of India reported.

“We have been moving towards enhancing transparency on loans. As part of this, we moved from base rate to marginal cost of lending rate. In furtherance of this objective, we are making it mandatory for banks to link personal and SME loans after April 2019,” the ToI report quoted N S Vishwanathan, RBI deputy governor, as saying.

It may be noted that Citibank is the only lender in India which uses external benchmark to price its home loans after the central bank had introduced a home loan scheme in which rate of interest was linked to the 91-day treasury bill.

“We believe that the use of external benchmarks for floating rate home loans provides transparency to the end consumer. We have seen a favourable response since its launch in March 2018, with 95% all new bookings opting for our three-month T-bill rate-linked home loan product,” the daily quoted Rohit Ranjan, head of secured lending, Citibank India, as saying.

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Other than improving transparency, an external benchmark is expected to ensure equal transmission of rates to both old and new loans, say experts.

It has been seen in the past that banks try to protect their margins by not bringing down rates in line with the RBI’s rate cuts or during growth phases they refuse to pass on rate hikes, resulting in loans continuing to grow despite the apex bank’s efforts to curb demand. With an external benchmark, banks will have no choice, the ToI report said.

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