State Bank of India (SBI) has done away with the fixed rate on home loans in the initial years and offered a fixed discount instead, but the move is unlikely to impress the Reserve Bank of India (RBI).
The regulator is, in general, uncomfortable with the idea of new customers being offered an interest rate benefit, while the existing ones see rates going up continuously. Like the latest SBI offering, many banks have a differential spread for different customers. Spread is the difference between the interest rate a bank charges and the rate at which it raises funds.
In a meeting last week with some bank chief executives, RBI argued that retail loan pricing should be done by banks on the basis of the portfolio and not on any individual. “If that is the case, then the central bank is asking how the spreads could be different for similar retail loans,” said a senior banker.
Banks have been offering concessional rates for new loans in the past two years.
RBI sources said the central bank was getting an increasing number of complaints that existing customers were bearing the burden of higher rates, while new customers are offered the benefit. As a result, RBI has stepped in to ensure that banks treat all their customers fairly. It now wants to ensure they should not have a differential spread for similar customers and loan amounts.
Another issue the central bank is uncomfortable with is the use of the term ‘floating rate’ loans. Bankers said RBI felt floating rate loans in India were different from those in the advanced economies, where the loan rate was linked to an external benchmark, such as the London InterBank Offer Rate.
However, in India, floating rates are linked to a bank’s own benchmark interest rate, which is sticky and does not signal interest rate movement efficiently. Bankers who attended the meeting with RBI said such a pure floating scheme was not possible in the Indian context, as deposit rates were fixed. The central bank insists banks should abstain from calling these floating rate loans and should instead say these are linked to their internal benchmark.
