RBI Announcement: From 1st of April Home Loans will be Linked to Market
Jan 10, 2019 Home Loan
Good news for home loan borrowers: the Reserve Bank of India (RBI) has directed banks to link the lending rates with an external lending benchmark from 1st of April 2019. This will bring in transparency around the rates of interest for home loans.
RBI stated that all the new personal, retail as well as micro and small enterprises loans need to be linked to one of the four market benchmarks from 1st of April 2019. The four benchmarks that banks have choices from are: 1) repo rate; 2) 92-day treasury bill yield; 3) 182-day treasury bill yield; or 4) any other external benchmark that’s approved by the Financial Benchmarks of India.
The US-based CitiBank launched India’s first market benchmark rate-linked lending home loan production March 2018. Here, the home-loan product of the bank is linked to the rate of treasury bills, used by the government for its short-term borrowings.
Know what has happened so far
At present, the financial institutions offer home loans at the marginal cost of funds-based lending rate (MCLR). If the rates are reduced by virtue of the RBI applying to a reduction in the repo rate (the rate at which the banking regulator lends money to the scheduled banks), only new customers are benefitted. If only in the old borrower’s personal contracts mentions and categorically asks to pass on the benefit, then banks tend to pass on the benefits. As such, financial institutions do not reset the loan until a specific period, as per the loan agreement despite if the RBI reduces rates several times.
Know about rest in home loan
MCLR was launched in 2016 by the RBI to bring more transparency in the lending interest. However, it majorly failed as the financial institutions use mater tools to maintain their profit margin. Any slight increase in the lending rate is passed on to the borrowers. Therefore, the RBI panel led by the RBI monetary policy department principal advisor Mr Janak Rajsuggested other ways to improve transparency in the lending process. And now that switching of rates to market-linked benchmark report has been submitted in 2018.
RBI stated that all the new personal, retail as well as micro and small enterprises loans need to be linked to one of the four market benchmarks from 1st of April 2019. The four benchmarks that banks have choices from are: 1) repo rate; 2) 92-day treasury bill yield; 3) 182-day treasury bill yield; or 4) any other external benchmark that’s approved by the Financial Benchmarks of India.
The US-based CitiBank launched India’s first market benchmark rate-linked lending home loan production March 2018. Here, the home-loan product of the bank is linked to the rate of treasury bills, used by the government for its short-term borrowings.
Know what has happened so far
At present, the financial institutions offer home loans at the marginal cost of funds-based lending rate (MCLR). If the rates are reduced by virtue of the RBI applying to a reduction in the repo rate (the rate at which the banking regulator lends money to the scheduled banks), only new customers are benefitted. If only in the old borrower’s personal contracts mentions and categorically asks to pass on the benefit, then banks tend to pass on the benefits. As such, financial institutions do not reset the loan until a specific period, as per the loan agreement despite if the RBI reduces rates several times.
Know about rest in home loan
MCLR was launched in 2016 by the RBI to bring more transparency in the lending interest. However, it majorly failed as the financial institutions use mater tools to maintain their profit margin. Any slight increase in the lending rate is passed on to the borrowers. Therefore, the RBI panel led by the RBI monetary policy department principal advisor Mr Janak Rajsuggested other ways to improve transparency in the lending process. And now that switching of rates to market-linked benchmark report has been submitted in 2018.
Know about changes now
With this approach of aligning lending rates with the market benchmarks, financial institutions will lose all their private capacity to use master tools to keep the lending arrangement in their best interest. So, they will have to maintain one spread throughout the loan tenure until and unless any borrower rightfully earns a revision by defaults on loans. With this new regime coming into force, EMI outgo of a borrower will change as and when rates go up or down, thereby simplifying the tracking liability.
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