Citi India on Monday launched a home loan product with rate of interest linked to the three-month treasury bill (T-bill), an external benchmark, in what could be the first such move by a bank in India’s consumer loan market.
At present, banks price mortgages at a spread over their one-year marginal cost of funds-based lending rate (MCLR). Citi India will price loans over the three-month T-bill rate, as put out on the website of Financial Benchmark India (FBIL). Loans in this category will be eligible for a reset in the interest rate every quarter, as opposed to an annual reset for most MCLR-linked loans. Citi will continue to retain its MCLR-linked home loan product and borrowers will have a choice between the two.
Shinjini Kumar, country business manager, global consumer bank, Citi India, said the product has been developed in response to the needs of a financially-savvy class of borrowers who seek transparency in financial services. “There is already an external benchmark-linked product available in the markets outside India,” she said. “In India, consumers have become very participative. We thought it might be a good idea to involve them.”
The introduction of a loan product linked to an external benchmark gains significance in light of the criticism banks have received for not adequately passing on the benefit of rate cuts to their borrowers by keeping a larger proportion of their loan books linked to the older base-rate system. In October 2017, a committee of the Reserve Bank of India (RBI) chaired by Janak Raj recommended that loan pricing be linked to one of three external benchmarks — the T-bill rate, the certificate of deposit (CD) rate or the RBI’s repo rate.
On November 16, 2017, RBI deputy governor Viral Acharya said, “The virtue of an external benchmark is that it is transparent, common across banks, and borrowers can compare various loan offers by simply comparing spreads over the benchmark (all else, such as maturity of the loan, being equal).”
However, documents accessed by FE through a Right to Information (RTI) query revealed that banks were less than happy about the idea of external benchmark-based pricing. While some had told the RBI that the proposal would lead to volatility in their margins, others had said the benchmarks proposed had no correlation to banks’ cost of funds.
Therefore, Citi India’s decision to retain its MCLR-linked mortgage product suggests that it wants to test the waters before considering a migration towards the RBI’s preferred means of pricing.