How Lenders Reacted To RBI’s New Loan Pricing Norms

The Reserve Bank of India's directive asking banks to link all new floating rate loans to external benchmarks from April 1 next year will increase transparency for customers but could also lead to greater volatility in monthly payments for borrowers.

The move will change the way banks fix interest rates for retail borrowers and small businesses.

Currently, the banks use their own cost of funds or internal benchmarks to determine lending rates for retail loans. Once the new loan pricing norms come into effect, the banks will need to use an external benchmark. Banks will have the discretion to decide on the spread over the benchmark rate but this will remain constant throughout the loan period unless there is a change in borrower's credit score.

Here's how banks reacted to the RBI's move:

New Norms To Impact Housing Loans Portfolio: SBI's PK Gupta

The new loan pricing norms laid down by the central bank would impact new home loans and the housing loan portfolios of banks, State Bank of India's Managing Director P.K. Gupta said.

“The initial impact may not be large. However, when the book build up over a while after the loans are linked to the external benchmarks, it could pose a challenge in terms of asset-liability management,” Gupta told BloombergQuint in an interaction. “Most of the personal loans are based on the fixed loan basis which are unlikely to get impacted. The housing loan portfolios would definitely witness an impact.”

Watch the full interaction here:

Transparency Will Come At The Cost of Volatility: Axis Bank's Rajiv Anand

While there is a greater level of transparency as we are using an external benchmark, it also means that there is a greater level of volatility, according to Axis Bank Executive Director Rajiv Anand.

“The change in repo rates, tightness in the market and the movement in the 182-day T-bill rates could drive change in the benchmark. Therefore, the transparency will come at the cost of volatility,” Anand told BloombergQuint in an interaction. “We are working on to ensure that the volatility is minimal from the customers' perspective and also on the use of appropriate benchmarks,” he said.

Watch the interview of Axis Bank's Rajiv Anand on the new loan pricing rules.

Customers Will Adjust To New Products: Citi India's Shinjini Kumar

Citi India, which already offers a mortgage product linked to an external benchmark, says that customers have adapted well to the new product over a period of time. “We introduced this product in January but over a period of time the acceptability has increased. Now over 90 percent of our bookings are in the external benchmark linked product,” said Shinjini Kumar, head of the consumer bank at Citi India. Kumar, however, added that banks will need to strengthen their risk management to take on the risk of interest rate fluctuation.

Watch the full interaction here: