For better customer experience and enhanced transparency in the process of credit pricing, a working committee has been formed that shall study credit pricing by banks, suggest stringent measures for rendering the process more transparent and even put forth a suitable credit policy under the floating interest rate option.
The differential rates on loans are charged by banks to stay competitive in the market or on account of their long-term business strategies or the relationship they maintain with a customer. Likewise, an existing customer in some instances will be able to bag a loan deal at a lower rate of interest and on the other hand rates may be reduced for a new customer for gaining more customers. Difference in the interest rates realized on loan disbursed by a bank and the cost of deposits ( interest amount paid on deposits) is the Net Interest Income for the bank that determines the profitability of the institution.
Few of the recommendations of the Anand Sinha-led working committee for Credit Pricing
-"The working group recommends the spread charged to an existing customer cannot be increased except on account of deterioration in the customer's credit risk profile".
- Spread charged that is determined taking into account factors such as customer relationship and competition should be decided by banks on the basis of a board-approved policy.
- The board of the bank is also asked to conform with the credit pricing policy of the bank in respect of any price differentiation and factor in risk-adjusted return on capital. The rationale of the adopted credit pricing is also to be justified to the RBI.
- Banks have also been asked to account for the marginal cost of funds in the computation of base rate i.e. the reference rate for lending, in case the average maturity term of deposits with the bank is on the lower side.
-The committee also suggested that periodicity of interest rate reset be specified in case of floating rate loan agreements and any changes should be effected on those particular dates only regardless of the changes made to the base rate in the interim period.
Suggestion to prove beneficial for borrowers
- The customers can in the near future be able to better compare loan rates as well as charges as IBA has been asked to develop a standard terminology to be implemented by all of the banks.
- Borrowers who do not draw cooperation from their existing lender in case they wish to transfer their debt to another lender will work to be against the bank as they shall be charged a penalty for it. Also, guidelines for quick and easy transfer of loans are foreseen in the near future.
- For retail loans, borrowers may be provided either of the options i.e. 'with exit' and 'sans exit' at the time of signing the loan agreement
Not only, the curb on such a differential treatment to borrowers, shall prove beneficial for borrowers but will also improve the asset-liability management of the banks.