Banks shouldn’t charge varying spreads from borrowers, says RBI committee

Apr 11 2014, 00:54 IST
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The central bank has also recommended setting up a benchmark base rate by the Indian Banks' Association. The central bank has also recommended setting up a benchmark base rate by the Indian Banks' Association.
SummaryIf the Reserve Bank of India’s latest proposals become prudential guidelines, banks will not be able to arbitrarily charge different spreads...

If the Reserve Bank of India’s latest proposals become prudential guidelines, banks will not be able to arbitrarily charge different spreads for different borrowers and will have to follow a board-approved system for the same.

An RBI committee, under the chairmanship of former deputy governor Anand Sinha, has made a series of recommendations for transparent pricing of loans by banks in its draft report on pricing of credit released on Thursday.

The central bank has also recommended setting up a benchmark base rate by the Indian Banks' Association called Indian Banks' Base Rate, which banks can use to price floating rate products.

RBI said banks should have a board-approved policy delineating the factors behind the pricing of a loan, which may include operating cost, credit risk premium and tenor premium and broad factors like competition, business strategy and customer relationship.

“Banks should be able to demonstrate to the Reserve Bank of India the rationale of the pricing policy,” the RBI said.

Noting that arbitrary changes in spreads has led to many complaints from customers, the RBI said that banks’ internal policy must spell out the rationale for, and range of, the spread and the delegation of powers in respect of loan pricing.

Further, the RBI said that changes in the base rate should not immediately result in a change in the interest rate of the loan, but the pricing must alter only on the next reset date as per the loan covenant.

Also, the borrower must be given an option of exiting the loan at the beginning itself. The loan can be priced accordingly in case of such a exit clause or without it, the RBI said.

Further, the benefit of interest reduction on the principal on account of pre-payments should be given on the day the money is received by bank without waiting for the next equated monthly instalment cycle date to effect the credit, the RBI said.

Banks told to draw up policy for property deals abroad

Mumbai, April 10: The Reserve Bank of India has asked banks with offices abroad to formulate a policy for overseas real estate transactions.

The RBI said it has come to its notice that some Indian banks have committed certain lapses while buying or selling real estate and taking or letting out property on lease or rentals in some places in foreign countries, it said in a notification.

“To avoid such lapses in future, it is advised that boards of directors

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