RBI Proposes Transparent Pricing Structure for Home Loans

October 23, 2009: A panel from Reserve Bank of India has proposed a transparent pricing structure for floating rate loans. As per the proposal the benchmark rates would get automatically revised with the reduction in cost of funds. The panel has suggested the banks to discontinue using bank’s prime lending rate in pricing floating rate loans and arrive at a base rate that reflects the cost of one year deposits. It has also proposed a cap on the extent of loans granted below the benchmark lending rate.

RBI governor D Subbarao said that though RBI slashed its repo rate, the rate at which it lends to banks, by 425 basis points the banks reduced their PLRs by 200 basis points only. Most of the benefit was passed only to the new borrowers. MV Nair, Chairman of Indian Banks’ Association said that if the proposal is accepted, it would bring more transparency in the system and the prevalent practice of lenders arbitrarily quoting low rates for new borrowers will stop. “The new system of base rate will help banks to price their loans more efficiently” said AC Mahajan, Chairman of Canara Bank.

However, some bankers say that though the base rate system would be transparent, it would not consider the non performing assets, which play an important role. Bankers also said that the proposed system would not make the home loans cheaper or more expensive since the present base rate for most of the banks is around 8.55 percent while most of them charge 9.75-10 percent. In another development, the apex bank has put a limit on Third Party ATM usage (Oct 20). According to the new regulation, a customer would be allowed Rs 10,000 per withdrawal and the number of transactions would be limited to five per month. The banks would charge Rs 18-20 per transaction in excess of five.